Interest income

Definition

Interest income is the earnings generated from investments in bonds or other interest-bearing assets. It represents the return received by bondholders for lending their money to issuers.

5 Must Know Facts For Your Next Test

1. Interest income from bonds is typically received in the form of periodic coupon payments.
2. The amount of interest income depends on the bond’s coupon rate and its face value.
3. Interest income is usually considered taxable income by most tax authorities.
4. Higher credit risk bonds generally offer higher interest rates to compensate investors for additional risk.
5. Bond prices and interest rates have an inverse relationship; when market interest rates rise, existing bond prices fall.

Review Questions

• What factors determine the amount of interest income a bondholder receives?
• How are coupon payments related to interest income?
• Why might a high-risk bond offer more interest income compared to a low-risk bond?

Related terms

Coupon Rate:

The annual interest rate paid on a bond's face value.

Face Value:

The original cost of the bond, which is repaid upon maturity.

Yield to Maturity (YTM):

The total return expected on a bond if held until it matures.