What type of cash flow does a bond typically generate?

Bonds typically generate fixed interest payments, which is a characteristic that distinguishes them from other financial instruments. When an investor purchases a bond, they are essentially lending money to the issuer (which could be a government or a corporation) in exchange for periodic coupon payments. These coupon payments are predetermined and remain constant throughout the life of the bond, which ensures that the investor knows exactly how much income to expect at regular intervals, usually semi-annually or annually.

The fixed nature of these payments provides a predictable income stream and can be particularly attractive to investors seeking stability and reliability in their cash flows. Unlike variable payments, which can fluctuate with market conditions or interest rates, the fixed interest payments do not change, making it easier for investors to plan their financial future.

This predictability is in contrast to equity returns, which are not guaranteed, and to lump sum payments, which would imply a single payment at maturity rather than ongoing cash flows during the bond's life. Therefore, the consistency and reliability of fixed interest payments make them a significant feature of bond investments.