7.3 Bonds, Diversification, and Asset Allocation

Which best describes a bond?

• A loan you get from the bank

• Something that holds stuff together

• A loan given to a company or government by an investor.

• Owning a small piece of a company or corporation

How do you make money from bonds?

• The company pays you part of their profit

• The company or government pays interest on the money borrowed

• If the price goes up and you sell it for a higher price, you make a profit

• You don't make money if interest rates goes up

Which is NOT a good reason to invest in both bonds and stocks?

• Bonds can help stabilize the risks of stocks if someone is a more aggressive investor

• If your stocks perform poorly, at least you’ll have the steady progress of your bonds

• For more income-oriented investors, stocks can help protect bonds from inflation

• The stock market as a whole produces better results than inflation

• Because investing in both will always give you the highest profits available

What is the risk you are taking when investing in bonds?

• The issuer of the bond (a.k.a. the company) might default not being able to pay you back

• You will most likely not make positive returns

• The principal of the loan may decrease over time

• The rate of the loan is always variable so you never know what they may or may not pay you

How can you minimize the risk when investing in bonds? (Choose 2)

• You can check the rating on the bond before you purchase it

• Own government bonds because they tend to be considered almost risk-free which means you can expect to receive your interest and principal if you are investing in a single bond.

• Always invest in a company that you like

• Invest in bonds that people you trust recommend because they are never wrong

• Only invest in stocks

True or False: Bonds are much more risky than stocks.

• True

• False

Why does the value of your bond decrease when interest rates increase?

• When interest rates increase, companies issue bonds with higher interest rates so your existing bond (which has lower interest rates) will be worth less.

• When interest rates increase, companies start looking to sell your bond to someone else because they want to pay less

• When interest rates increase, companies start to put more money into their company so their stock price will increase

• When interest rates increase, companies start to ask for more money because they want to start expanding their business

Which best describes diversification?

• The attempt to reduce risk by spreading your investments across a variety of different asset classes, like stocks, bonds, cash, etc.

• Investing all your money in the same stock because you really believe in the company and you think they will grow a lot in the coming year

• Putting your money into different types of savings accounts so that you won't lose your money if the stock market decreases

• Buying a bond from the government because they are likely to pay you back

How does diversification protect investors?

• Diversification helps lower your risk by reducing the volatility or how much your investments will go up or down over time.

• It guarantees that you will make money on your investments.

• If a stock you are invested in decreases, it will pay you the difference so that you don't lose your money

• It does not allow you to enter into unprofitable investments

Which is NOT an example of an asset class?

• Stocks

• Bonds

• Cash

• Cars

• Hard assets: Gold, real estate, etc.