Investment Fixed Income and Bonds 2

Question 1

What is a 'callable bond'?

Accepted Answer

A bond the issuer can redeem before its maturity date

Answer

A callable bond gives the issuer the right to repay the principal before the stated maturity date, usually when interest rates fall and the issuer can refinance at lower cost.

Question 2

What is the primary risk that causes high-yield ('junk') bonds to offer higher interest rates than investment-grade bonds?

Accepted Answer

Credit (default) risk

Answer

High-yield bonds are issued by companies with lower credit ratings, meaning there is a greater probability the issuer may default on interest or principal payments.

Question 3

A zero-coupon bond is sold at $600 and matures at $1,000 in 5 years. How does the investor earn a return?

Accepted Answer

Through the difference between purchase price and maturity value

Answer

Zero-coupon bonds pay no periodic interest; instead, investors earn the return from the discount at purchase, receiving the full par value at maturity.

Question 4

What is the 'spread' in the context of bond investing?

Accepted Answer

The difference in yield between a bond and a benchmark (e.g., Treasuries)

Answer

In bond markets, spread most commonly refers to the yield difference between a bond (such as a corporate bond) and a comparable-maturity Treasury, reflecting additional risk.

Question 5

Which of the following best describes a 'municipal bond'?

Accepted Answer

A bond issued by a state or local government, often tax-exempt

Answer

Municipal bonds are issued by state and local governments to fund public projects; interest income is typically exempt from federal income tax and sometimes state and local taxes.

Investment Practice Test

Investment Practice Test

Investment Fixed Income and Bonds 2