Investing/Bonds

Which of the statements below BEST describes the relationship between risk and return when considering an investment?

• Investors expect to earn a lower return when they invest in a risky asset 

• Investors expect to earn a higher return when they invest in a low risk asset, like a bond

• Investors expect to earn a higher return when they invest in a high risk asset like stock in a small company

• Investors do not expect to earn a return on a high risk investment but rather expect to lose their money

How is a bond different from a stock?

• A bond is a loan you give to an organization while a stock is partial ownership in the company.

• Bonds are typically riskier than stocks but have the potential to earn higher returns. 

• A bond is usually issued by smaller, startup companies while stocks are with well established organizations. 

• Bonds are best for earning high returns while stocks are best for providing a stable source of income. 

Which of the following most accurately describes what a bond is?

• A bond is a government loan made to an individual investor with the expectation that it will be paid back with interest

• A bond is an investment in which a corporation lends an individual investor money with the expectation that it will be paid back with interest

• A bond is a government loan made to a corporation with the expectation that it will be paid back with interest

• A bond is an investment in which an investor lends money to a corporation or government with the expectation that it will be paid back with interest

Jill buys a bond that has a fixed coupon rate of 3%. Six months later, similar bonds that are issued have a coupon rate of 4%. Which of the following is TRUE if she chooses to sell the bond before maturity?

• The price of Jill’s bond will increase

• More investors will be willing to buy Jill’s bond

• The interest rate of Jill’s bond will increase to reflect the current market

• The price of Jill’s bond will decrease

What is one difference between bonds and bond funds…

• Buying an individual bond is generally cheaper than buying a bond fund

• A bond fund can help you diversify your investment portfolio

• Bonds pay dividends to its investors

• You receive the principal amount you invest in a bond fund after a certain amount of time

By the end of a bond's maturity, the investor will have received

• Only the face value of the issued bond

• The face value of the bond issued and interest payments

• Only interest payments

• Half the face value of the issued bond and interest payments

What is default risk?

• The risk that the investor is not able to pay the face value of the bond.

• The risk that the investor demands the face value of the bond before the bond fully matures.

• The risk that the company or government is not able to make interest payments.

• The risk that the company or government is unable to pay back the investor.