Where does the return on a bond come from?

Three numbers to keep apart

A bond's return is not just the coupon. It is worth keeping three concepts apart:

If you buy a bond below face value, your actual return is higher than the coupon: you get both the coupon and the price rise up to maturity. If you buy above face value, the return is lower than the coupon.

Same coupon, different return

The real interest rate is what counts

In the end, what matters to a bond investor is the real interest rate: the nominal rate minus inflation. A 4% coupon with 5% inflation is in reality a −1% real return: the money grows in nominal terms but loses purchasing power.

Inflation-linked bonds tie the coupon and the capital to inflation. They protect purchasing power, but they yield less in nominal terms when inflation is calm. When real interest rates are positive, an ordinary bond investment offers a genuine return above inflation.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.