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Interest is what you pay to borrow money – or what someone pays you to borrow money from you. So, when you take out a loan from a bank, you have to pay a set amount of money (like, say, 3% per year) for the privilege of borrowing that money. Equally, when you buy a bond, you are effectively lending money to a company or government and, as such, are paid interest each year (i.e. a cash payment) by the borrower in order to compensate you for the fact that you are lending them your money.

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