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Here’s your solution on how investors profit from debt: they earn interest payments on the loaned amount—as explained by New Assignment Help USA’s detailed insights—differing from methods like receiving dividends or holding debt without returns.
A) By receiving dividends from company profits
B) By earning interest payments on the loaned amount
C) By selling the debt to other investors at a loss
D) By holding debt without expecting any returns
The second option best describes how an investor makes money off debt. When an investor buys a bond or some other debt instrument, they are basically lending their money. The borrower pays interest on the debt to the lender until the maturity of the debt instrument or until the principal is paid off. For example, say you were to buy a debt for $1000 for 5 years of maturity at 5% interest per year. Now you will earn $50 per year as interest over the debt until the 5th year when you will receive your principal amount back. So you used your initial investment of $1000 into $1250 over the course of 5 years.
The first option of “Receiving dividends from company profits” is also another way for investors to earn money. However, it's not based on debt. You get dividends from a company's profits only when you own a part of the company as in its shares. It's not a “debt” but an ownership.
For example, imagine you were to invest your money in Apple
Other Related Questions
A bond is a debt security that can be issued by both the government and a corporate firm to meet their needs for capital. In return, they pay annular interest to the investor. The rate of interest can be fixed to reduce risk or variable to enhance profit. It also has a maturity period by which the principal amount is also paid in full.
A loan on the other hand is a contract between the borrower and lender. There is a higher risk of default here, the interest rates can vary, and most of all they can't be traded in the securities market.
Government bonds and corporate bonds are similar in nature but opposite when it comes to risk and return. Government bonds are known for giving varied but stable interest rates. This makes them low-risk, low-return investments. On the other hand, corporate bonds are based on the company's market performance. So they can offer higher interest rates but there is similarly higher risk among them.
Yes, investors can sell bonds before they mature on secondary markets. Bonds as debt instruments can be transferred to others and the buyer will become the new lender. It is common practice when the original bondholder sees less than satisfactory returns from the investment or has better options with higher returns available.
Debt instruments have options between a fixed rate of returns and a variable one. As the name suggests, afixed rate of return gives a fixed percentage of your debt amount per year irrespective of the market conditions. Variable rates on the other hand give returns based on the market conditions.
Debt ETF is a collection of Debt and bond-related instruments that are traded on varied exchanges. To understand it in simple terms, think of it as a collection of bonds that you can purchase as a single unit. It gives the investors the option to invest in a large number of bonds at the same time. However, it also brings higher risks since every bond can have different rates too. Similarly, it could also contain junk bonds. Hence though rewarding it could be riskier too.
