Diversification: Reducing Risk Using Bonds

Which of these bond terms is most similar to the stock market concept of interest rate?

• default risk

• speculating

• par value

• coupon

Which of these statements does NOT accurately describe Treasury bonds?

• They are the least risky bond investment you can make

• Investors are drawn to them because they typically pay a high coupon.

• You can purchase them without using a broker at all.

• They are available in smaller denominations than corporate bonds.

Interest rates and bond prices inversely related, which means that when interest rates, rise, bond prices will fall.

• True

• False

Stocks are generally considered less risky investments than bonds

• True

• False

If a company goes bankrupt, bondholders come before stockholders in determining how the remaining assets of the company are divided

• True

• False

Most individuals create portfolios consisting of all stocks or all bonds but rarely ever combine the two asset types

• True

• False

Stock prices and bond prices change on a daily basis

• True

• False

The annual income that comes from an investment in stock of a company is called a dividend while the annual income from a bond is called a coupon

• True

• False

Which of the following is not an advantage of purchasing a bond fund instead of an individual bond?

• You get to choose all of the individual bonds you want to put into your fund.

• Your risk is diversified over multiple bonds, so if one does poorly, your entire fund isn’t ruined

• Bond funds are more cost effective because they don't require the constant buying and selling of individual bonds

• A bond professional has chosen the makeup of the funds, so you benefit from their knowledge.

Order these 10-year bonds from the safest to least safe investment: 1) AAA-rated Corporate Bond 2) U.S. Treasury Bonds 3) A-rated Corporate Bond 4) Non-investment grade Corporate Bond (Junk bonds)

• 2 1 3 4

• 1 2 3 4

• 3 4 2 1

• 4 3 1 2