What
is Investment Interest?
I recently bought a bond for the first time ever,
what I’d like to know is how does investment interest work and how can I start
collecting?
Basically, you most likely bought your bonds in
some type of brokerage or other financial account, if the bond is a bearer
bond, which means that the bond was issued in your name, you simply hold the
bond in the account and the interest payment will be made into that account.
If you bought a bond which is a “coupon bond”, then
the interest payment will most likely be made two times a year and will be
specified on the face of the bond which is redeemable for the entire principal
amount at maturity.
Another type of bond you may have purchased is a
“callable bond”. This means that the issuer can “call” the bond and return your
principal without paying the remainder of the interest. You would then be
forced to reinvest your funds at a lower rate. Callable bonds usually get
called when interest rates are dropping since it costs the issuer less to call
the bond and refinance at a lower rate.
Investment interest can also be accrued in other
types of accounts, for example a forex account will collect interest every day
if you happen to be long a currency which carries a higher interest rate than
the currency which you are short.
For example if you bought Australian dollars and
sold Japanese Yen, then the interest rate in Australia would be paid to you,
since the rate is higher than in Japan while you would have to pay out the
prevailing interest rate in Japan for the short Japanese Yen which would be
cancelled out by the interest received on the Australian Dollars. At the end of
every trading day, a “rollover” is paid out or charged on all currency
positions.