Understanding Bonds

Bonds are debt instruments issued by entities like governments and corporations to finance projects. They represent loans made by investors to the issuer, with a face value indicating the loan amount. Bonds pay interest, known as a coupon, over a specified period until maturity, when the issuer repays the loan. Al's Ice Cream, for example, issues bonds to fund expansion, offering a 10-year bond with an 8% interest rate. Bonds can be sold before maturity, and their risk is often linked to the interest rate. Corporations and governments issue bonds for various projects, with higher interest rates typically indicating higher risk.

What is a bond primarily considered as?

• A government grant

• A form of equity

• A type of stock

• A loan from investors to the issuer

What is the term used for the interest received by a bondholder?

• Principal

• Dividend

• Coupon

• Premium

What happens when a bond reaches its maturity date?

• The bondholder loses their investment

• The bond is automatically renewed

• The bondholder receives additional shares

• The bond issuer repays the loan to the investor

Why did Al's Ice Cream decide to issue bonds?

• To pay off existing debts

• To reduce their workforce

• To build new ice cream plants

• To increase their stock value

How much interest does Tom receive annually from his bond investment?

• $100

• $80

• $120

• $50

What is the face value of the bond purchased by Tom?

• $500

• $1,500

• $2,000

• $1,000

Why do corporations typically issue bonds?

• To increase employee salaries

• To fund capital projects

• To pay dividends

• To buy back shares

What is the relationship between bond interest rates and risk?

• Interest rates have no relation to risk

• Higher interest rates usually mean higher risk

• Higher interest rates usually mean lower risk

• Lower interest rates usually mean higher risk