Bond Basics
What is a bond?
A) A share of ownership in a company
B) A loan made by an investor to a borrower
C) A government-issued tax
D) A type of insurance contract
Answer: B) A loan made by an investor to a borrower
Which of the following is a government bond?
A) Treasury bond
B) Municipal bond
C) Corporate bond
D) Convertible bond
Answer: A) Treasury bond
What is the relationship between bond prices and yields?
A) They move in the same direction
B) They move in opposite directions
C) They are unrelated
D) They both remain constant
Answer: B) They move in opposite directions
What does a credit rating on a bond measure?
A) The bond’s interest rate
B) The issuer’s ability to repay debt
C) The bond’s maturity
D) The inflation rate
Answer: B) The issuer’s ability to repay debt
Which U.S. government agency issues Treasury bonds?
A) Federal Reserve
B) U.S. Treasury Department
C) SEC
D) FDIC
Answer: B) U.S. Treasury Department
Who issues bonds?
A) Only governments
B) Only corporations
C) Governments, corporations, and municipalities
D) Only central banks
Answer: C) Governments, corporations, and municipalities
What is a municipal bond?
A) Issued by foreign governments
B) Issued by local or state governments
C) Issued by corporations
D) Issued by central banks
Answer: B) Issued by local or state governments
What is the yield to maturity (YTM)?
A) The coupon rate
B) The total return if the bond is held to maturity
C) The price at issuance
D) The inflation rate
Answer: B) The total return if the bond is held to maturity
Which rating indicates the highest quality bond?
A) BBB
B) BB
C) AAA
D) B
Answer: C) AAA
What’s the typical maturity for a Treasury bond?
A) 1–5 years
B) 5–10 years
C) 10–30 years
D) Less than 1 year
Answer: C) 10–30 years
What is the face value of a bond?
A) The market price of the bond today
B) The bond’s coupon payment
C) The amount repaid to the investor at maturity
D) The interest rate
Answer: C) The amount repaid to the investor at maturity
What is a corporate bond?
A) Issued by a government agency
B) Issued by a company to raise money
C) A bond backed by mortgage payments
D) A stock option
Answer: B) Issued by a company to raise money
If a bond’s market price is above face value, it is trading at a:
A) Discount
B) Premium
C) Par value
D) Loss
Answer: B) Premium
What is a junk bond?
A) A bond issued by a startup company
B) A bond with low credit quality and high risk
C) A bond that cannot be sold
D) A bond with no coupon payments
Answer: B) A bond with low credit quality and high risk
Why might an investor buy bonds instead of stocks?
A) Bonds offer higher risk
B) Bonds guarantee a fixed income stream
C) Bonds always outperform stocks
D) Bonds never lose value
Answer: B) Bonds guarantee a fixed income stream
What does a bond’s coupon rate represent?
A) The annual interest payment as a percentage of face value
B) The bond’s maturity date
C) The market interest rate
D) The current yield
Answer: A) The annual interest payment as a percentage of face value
Which bond type can be converted into company shares?
A) Callable bond
B) Convertible bond
C) Treasury bond
D) Junk bond
Answer: B) Convertible bond
If the bond’s coupon rate is lower than current market rates, the bond will sell:
A) At a premium
B) At par
C) At a discount
D) Above par
Answer: C) At a discount
Which risk affects bondholders when interest rates change?
A) Default risk
B) Interest rate risk
C) Inflation risk
D) Reinvestment risk
Answer: B) Interest rate risk
What is the main purpose of issuing bonds for a company?
A) To share ownership
B) To raise capital without giving up equity
C) To reduce taxes
D) To increase dividends
Answer: B) To raise capital without giving up equity
What happens when interest rates rise?
A) Bond prices rise
B) Bond prices fall
C) Bond yields fall
D) Bond values stay the same
Answer: B) Bond prices fall
Which of the following bonds has the lowest risk?
A) Treasury bond
B) Corporate bond
C) Junk bond
D) Convertible bond
Answer: A) Treasury bond
Which term describes the date when a bond’s principal is repaid?
A) Issue date
B) Maturity date
C) Coupon date
D) Settlement date
Answer: B) Maturity date
What happens to bondholders if a company defaults?
A) They lose all future payments
B) They automatically receive dividends
C) They convert to stock
D) They receive extra coupons
Answer: A) They lose all future payments
What is the coupon payment on a $1,000 bond with a 5% coupon rate?
A) $5
B) $50
C) $500
D) $1,000
Answer: B) $50