Investment Fixed Income and Bonds 1

Question 1

What happens to a bond's price when interest rates rise?

Accepted Answer

The price falls

Answer

Bond prices and interest rates have an inverse relationship — when rates rise, existing bonds with lower coupon rates become less attractive, so their prices fall.

Question 2

What is the 'par value' of a bond?

Accepted Answer

The face value repaid at maturity

Answer

Par value (also called face value) is the principal amount the issuer promises to repay the bondholder when the bond matures.

Question 3

A bond's coupon rate is 5% and its current market price is below par. What is true about its current yield?

Accepted Answer

Current yield is greater than 5%

Answer

When a bond trades below par, the fixed coupon payment represents a higher percentage of the lower purchase price, making the current yield greater than the coupon rate.

Question 4

Which type of bond is backed by the full faith and credit of the U.S. federal government?

Accepted Answer

Treasury bonds

Answer

U.S. Treasury bonds are direct obligations of the federal government, backed by its full taxing authority, making them among the safest investments.

Question 5

What is 'yield to maturity' (YTM)?

Accepted Answer

The total return earned if a bond is held until it matures

Answer

YTM is the total annualized return an investor would earn if the bond is purchased at the current price and held until maturity, accounting for coupon payments and any gain or loss on principal.

Investment Practice Test

Investment Practice Test

Investment Fixed Income and Bonds 1