An 'interest-bearing' asset, account, or instrument is one that generates income in the form of interest payments over a specified period. This interest is typically calculated as a percentage of the principal amount and is paid at regular intervals, such as monthly, quarterly, or annually. interest-bearing investments are popular as a way to grow wealth, providing a return on invested capital. These types of investments often come with varying levels of risk and return, reflecting the security and duration of the investment.
Interest-bearing meaning with examples
- Saving for a down payment, Sarah chose a high-yield interest-bearing savings account at her local bank. She understood the trade-off between accessibility and returns: she couldn't immediately access funds without a penalty, but the higher interest earned would significantly boost her savings, eventually reaching her goal faster. This method allowed for her investment to keep pace with inflation.
- Retirees often rely on portfolios of interest-bearing bonds, government bonds in particular, for a stable income stream. The predictable payments from these bonds cover everyday expenses, and provide a sense of financial security in their later years. While returns are typically moderate, this stability is a good strategy for managing retirement funds.
- Corporate bonds are interest-bearing debt instruments, offering a higher yield than government bonds, reflecting a higher risk of default. Investors assess a company's creditworthiness before buying these, as it indicates a higher risk of the company not being able to pay their interest. Careful due diligence is crucial when considering interest-bearing corporate bonds.
- Money market accounts, like interest-bearing checking accounts, are popular among those who want to park short-term cash. These accounts offer a slightly higher interest rate than standard checking accounts, with the ability to quickly withdraw money when needed. It is important to note that these account types typically require a minimum balance to be maintained.
- A certificate of deposit (CD) is an interest-bearing time deposit, which pays a fixed interest rate for a specific period. CDs are a great option if the money is not needed for a fixed amount of time, and typically have a higher interest rate than savings accounts. It's a low-risk investment, allowing individuals to earn a guaranteed return.