MWLA Spring Quiz #1

All of the folowing are true about bonds except...

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

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

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

• 1. Bonds are considered a riskier investment option than stocks.

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

• 1. Only the face value of the issued bond

• 1. The face value of the bond issued and interest payments

• 1. Only interest payments

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

3. What is default risk?

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

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

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

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

4. 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?

• 1. Lower the interest rate

• 1. Sell your bond at a discounted price

• 1. Increase the interest rate

• 1. Sell your bond at a higher price

The higher the risk associated with a bond, the (a)   likely a corporation might default on paying the investor. Interest rates for riskier bonds tend to be (b)   so that investors are (c)   willing to take on that risk. A riskier bond usually comes from a corporation that has a ​ (d)    credit rating.

• more
• higher
• low
• lower
• less

Government bonds tend to be riskier than corporate bonds.

• True
• False

When overall interest rates rise (to 10%), the bond you already own (with 5% coupon rate) becomes ​ (a)   valuable to potential buyers, so its price will ​ (b)   .When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes ​ (c)    valuable to potential buyers, so its price will ​ (d)   . Generally, the longer the duration of the bond, the ​ (e)   the chance the bond price may change due to changes in yield.

• less
• decrease
• more
• increase
• higher
• lower

Organize these options into the right categories

Groups:

(a) Bond

,

(b) Bond Fund

• • Pays dividends

• • Expensive because you buy an entire bond

• • Changes in interest rates can impact you if you plan to sell the bond before its maturity

• • Principal investment is not returned

• • Regular interest payments

• • Cheaper than buying a bond

• • Less risky

• • Diversified

• • Principal is returned to investor

• More Risk

The higher the risk the greater the rewards.

• True
• False

Trading stocks daily is a way to lower risk.

• True
• False