Investing 101 Bonds

You buy a bond with a fixed coupon rate of 5%. A year later, similar bonds that are issued have a coupon rate of 3%. Which of the following is TRUE?

• The price of your bond will increase.

• The demand for your bond will decrease.

• The price of your bond will stay the same.

• The interest rate for your bond will fall to 3%.

Which of the following accurately describes a difference between an individual bond compared to a bond fund?

• A bond pays you dividends while a bond fund pays you regular interest.

• A bond guarantees you a higher rate of return than a bond fund.

• A bond is issued by a company while bond funds only invest in government bonds.

• A bond is considered to be a less diversified investment than a bond fund.

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 high risk asset.

• Investors expect to earn a higher return when they invest in a low risk asset.

• Investors expect to earn a higher return when they invest in a high risk asset.

• Investors expect to earn zero return when investing in a low risk asset.

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 a company.

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

• Bonds are usually issued by smaller startup companies while stocks are issued by well established organizations.

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

All of the following are TRUE about bonds EXCEPT

• Bonds are considered a riskier investment option than stocks.

• A bond is a loan given to a company or government by an investor who receives interest in return.

• Companies and governments issue bonds to fund new projects or ongoing expenses.

• Bonds are a way for investors to diversify their portfolios and generate additional income.

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 company or government is not able to make interest payments

• 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 unable to pay back the investor.

You've decided you want to sell a bond before its maturity date. Interest rates are currently higher than when you bought the bond. What will you likely have to do to make your bond more appealing to investors?

• Lower the interest rate.

• Sell your bond at a discounted price.

• Increase the interest rate.

• Sell your bond at a higher price.

Interest rates for riskier bonds tend to be lower so that investors are more willing to take on that risk.

• True

• False

A riskier bond usually comes from a corporation that has a high credit rating.

• True

• False