FIN376 - CHAPTER 1

What is a bond?

• A type of savings account

• A short-term fixed income security

• A long-term fixed income security

• A type of equity investment

Who are the parties involved in a bond?

• Government only

• Corporations only

• Government and corporations

• Individual investors

What is the primary function of bond rating agencies?

• To set the interest rates for bonds

• To regulate the trading of bonds

• To evaluate the credit quality of bonds

• To determine the maturity date of bonds

What is the main advantage of investing in bonds?

• Higher risk compared to equity capital

• Unpredictable stream of income

• Guaranteed high returns

• Secured creditors status

What is the term used to describe the return that an investor will receive when the bond is held till maturity?

• Nominal Yield

• Yield to Maturity

• Current Yield

• Yield to Call

What is the significance of bond ratings to investors?

• Determines the face value of the bond

• Affects potential market behavior as well as market yields

• Regulates the trading of bonds

• Indicates the interest rate of the bond

What is the rating given to bonds that carry a very high risk of default?

• C

• BB

• D

• AAA

What is the risk that the value of investment may decline due to economic changes or events?

• Legislative Risk

• Market Risk

• Inflation Risk

• Exchange Rate Risk

What is the difference between a bond and a stock?

• Bonds represent ownership in a company, while stocks represent debt

• Bonds pay fixed interest, while stocks pay dividends

• Bonds have higher risk, while stocks have lower risk

• Bonds have voting rights, while stocks do not

How do bond prices typically react to changes in interest rates?

• Bond prices increase when interest rates rise

• Bond prices decrease when interest rates rise

• Bond prices remain unaffected by changes in interest rates

• Bond prices fluctuate randomly with changes in interest rates