You seem like a person who can answer this.
Is this how it works?
You buy a bond for let's say £100. Each year out of the five years it makes compound interest of 6.5%
This would give you a total of around £137.
Then the bond matures and you get the return of original bond price at the market rate.
Not usually. There are different types of bond but the most common is fixed interest.
The issuer, with their advisers, decide what the interest rate will be (it's called the coupon). Let's say 6.5% as you say. It then gets sold into the Primary Market. Depending on demand, buyers may not pay 100 for each bond - but the par value is 100 and that's what you get back at the end.
Every six months (say - it can be more or less frequent), the coupon is paid. In our example £3.25 every six months. It's not compounded.
At the end (the redemption date) you get your £100 par value + a final £3.25 coupon. This is how government bonds (called gilts) work.
But there can also be floating coupons. So, for example, the bond pays a coupon of 6 months LIBOR + 3.35%, which is set by looking at the 6 month LIBOR rate every six months. Or zero coupon bonds (called bills usually) which pay no interest but are sold at a discount. These are usually shorter term (say 1 year). So you buy a bill for £97 and a year later you get £100 back.
All bonds are also traded in the secondary market too - so there is a market price and you can sell before the end.
It is possible to get compounded coupons - these are called step-up bonds. But they are much less common - this is because the money isn't paid out frequently and hence the buyer has an increasing amount of credit risk to the issuer - so usually they would expect a higher coupon to reflect this increased risk.
