Corporate bonds primarily pay interest through a mechanism known as coupon payments. When an investor purchases a corporate bond, they are essentially lending money to the issuing company in exchange for periodic interest payments, which are typically paid every six months.
The interest rate, or coupon rate, is predetermined at the time of issuance and is based on several factors, including the creditworthiness of the issuer and prevailing market conditions. For example, if a corporate bond has a face value of $1,000 and a coupon rate of 5%, the bondholder would receive $50 each year until maturity.
When the bond matures, the issuer is also obligated to repay the bond’s face value to the investor. This dual benefit of receiving regular interest payments along with the return of the principal amount makes corporate bonds an attractive option for many investors looking for a more stable income stream compared to stocks.