Bonds & Bond Funds
A bond is best described as this type of financial instrument: it represents either a share of ownership or a loan to an entity?
A loan to the issuer
Buying a share of stock gives you what claim in a company?
A share of ownership (partial ownership) in the company.
Name one major U.S. stock exchange where people buy and sell shares.
Examples: New York Stock Exchange (NYSE), NASDAQ.
Diversification means spreading your money across different things. Give one simple example.
Example: Put some money in stocks, some in bonds, maybe in different industries.
This type of account must be sponsored by your employer and they might provide matching of your contributions.
401(k)
If a government bond has a face value of $1,000 and an annual coupon rate of 3%, how much interest does it pay each year?
$30 per year
Define a dividend in one sentence.
A dividend is a payment a company may make to shareholders from its profits.
Explain what an index (like the S&P 500) measures in one sentence.
An index measures the performance of a group of selected stocks, representing a segment of the market.
Explain the relationship between risk and expected return in investing (one sentence).
Generally, higher expected return comes with higher risk; lower risk typically yields lower expected return.
A simple rule of thumb for retirement savings is to save a percentage of your income each year. If someone follows a recommendation to save 10% of their gross pay, and their gross pay is $2,000 per month, how much do they save each month?
$200 per month
Explain what a bond fund is and one advantage of investing in a bond fund compared to a single bond.
A bond fund pools many bonds and offers diversification and professional management; advantage: reduces single-issuer risk and provides liquidity.
A company splits its stock 2-for-1. If you owned 50 shares before the split, how many shares will you own after the split, and what happens to the price per share (in general terms)?
After a 2-for-1 split you would own 100100 shares and the price per share is generally about half of the pre-split price (the total value of your holdings stays roughly the same).
Describe what a broker does for an investor.
A broker executes buy/sell orders for investors and may provide advice or trading platforms.
Name and briefly describe one way an investor can reduce risk in their portfolio.
Examples: diversification, asset allocation, holding bonds or cash, using dollar-cost averaging, using stop-loss orders.
Explain why starting to save for retirement earlier is beneficial. Include the financial concept that makes small early contributions grow significantly over time.
Because of compound interest—earlier contributions have more time to earn returns on returns.
Describe how bond prices generally move when interest rates in the economy rise.
When interest rates rise, existing bond prices generally fall.
If you buy 10 shares of a stock priced at $25 per share, what is your total investment?
$250 total investment
Explain the difference between buying shares on an exchange versus buying shares through an index fund.
Buying on an exchange = purchasing individual company shares; buying through an index fund = buying a diversified portfolio that tracks an index (gives instant diversification).
Suppose an investor has a portfolio made up of several stocks that are all in the same industry. Explain one specific change the investor could make to reduce industry-concentration risk and why that change helps.
The investor could diversify by adding stocks from different industries or by adding bond funds or index funds that cover many sectors; this reduces concentration risk because losses in one industry are less likely to affect the entire portfolio when holdings are spread across sectors or asset classes.
Compare a Traditional IRA and a Roth IRA in one sentence focusing on when the money is taxed.
Traditional IRA: contributions may be tax-deductible now and taxed on withdrawal; Roth IRA: contributions are made with after-tax dollars and withdrawals in retirement are generally tax-free.
A corporate bond is rated lower by credit agencies, which typically means it offers a higher yield. Explain the trade-off investors face when choosing a lower-rated corporate bond.
Lower-rated bonds (higher yield) offer higher potential income but greater risk of default — trade-off: higher return vs higher credit/default risk.
Describe one reason stock prices can change quickly from day to day.
Reasons: new information (earnings reports, news), changes in investor sentiment, economic data, or supply/demand imbalances.
Give one reason why markets sometimes experience large drops (market crashes) and one action investors often take during such times.
Reasons: panic selling, economic shocks, bubbles bursting; actions investors take: sell to cut losses, buy the dip, or hold/ride out volatility (answers may vary).
A balanced portfolio sometimes uses both stocks and bonds. Explain why combining these two types of investments can lower overall portfolio volatility.
Stocks provide growth potential while bonds often provide more stable income; combining them can smooth returns because they often respond differently to economic changes.
If you plan to retire in 30 years and want to estimate how much you need, name two important factors you must consider when calculating your retirement goal.
Examples: expected annual retirement expenses, expected rate of return on savings, inflation, and retirement length (any two of these).