Difference between the regular interest (R) bond and compound interest (C) bond is Question 18 options: There is no difference between both Interest on a regular interest (R) bond is paid annually until the bond matures or when the taxpayer cash it in while, the Interest on a compound interest (C) bond is not paid until the taxpayer cash it in. None of the above
The Correct Answer and Explanation is:
The correct answer is:
Interest on a regular interest (R) bond is paid annually until the bond matures or when the taxpayer cashes it in, while the interest on a compound interest (C) bond is not paid until the taxpayer cashes it in.
Explanation:
Bonds are financial instruments used by governments, corporations, or other entities to borrow money from investors. In return, bondholders receive interest payments, and the principal is returned upon maturity. Bonds can generally be classified into two types based on how interest is handled: regular interest (R) bonds and compound interest (C) bonds.
- Regular Interest (R) Bond:
- For a regular interest bond, the bondholder receives periodic interest payments, usually annually or semi-annually.
- The interest is paid out to the bondholder until the bond matures.
- The bondholder can choose to either reinvest this interest or use it as income. However, the principal remains intact until the bond matures.
- Example: If you purchase a 10-year bond with a 5% annual interest rate, you will receive 5% of the bond’s face value as an annual interest payment every year for the next 10 years.
- Compound Interest (C) Bond:
- In contrast, a compound interest bond does not pay interest periodically. Instead, the interest accumulates and compounds over time.
- The bondholder will not receive any interest payments during the life of the bond. Instead, the interest is added to the principal balance, and the final payout (at maturity or when the bond is cashed in) includes both the principal and the compounded interest.
- The compounded interest grows over time and increases the total amount the bondholder receives at maturity.
- Example: If you purchase a bond with compound interest at an annual rate of 5%, instead of receiving interest payments annually, the interest will be calculated on the total amount (including previous interest) at the end of each period, increasing your payout when the bond matures.
In summary, the key difference is the timing and manner of interest payments. Regular interest bonds provide regular interest payments to the holder, while compound interest bonds accumulate interest over time, which is paid out only when the bond matures or is cashed in.
