Understanding Bonds

What is a bond?

• A type of stock

• A loan from an investor to a borrower

• A type of savings account

• A type of insurance policy

What is the interest rate (coupon rate) on a bond?

• The percentage of the bond's face value that the borrower pays to the investor each year

• The percentage of the bond's face value that the investor pays to the borrower each year

• The total return on investment (interest rate + any capital gains/losses)

• The bond's credit rating

What is the face value (par value) of a bond?

• The amount the borrower promises to pay the investor when the bond matures

• The total return on investment

• The interest rate paid annually

• The bond's credit rating

What is the maturity date of a bond?

• The date when the bond is issued

• The date when the bond's interest rate changes

• The date when the borrower repays the face value to the investor

• The date when the bond's credit rating changes

Who is the issuer of a bond?

• The investor

• The borrower (corporation or government)

• The credit rating agency

• The stock exchange

What is the yield on a bond?

• The interest rate on the bond

• The total return on investment (interest rate + any capital gains/losses)

• The bond's credit rating

• The face value of the bond

What is a bond rating?

• A grade that reflects the borrower's creditworthiness and risk of default

• A grade that reflects the bond's yield

• A grade that reflects the bond's face value

• A grade that reflects the bond's maturity date

What is a zero-coupon bond?

• A bond that pays interest annually

• A bond that pays interest semi-annually

• A bond that pays no interest until maturity

• A bond that pays interest monthly

What happens to the bond's face value at maturity?

• It increases

• It decreases

• It remains the same

• It is repaid to the investor

Why do investors buy bonds?

• To earn a high return on investment

• To earn a steady income stream