Bond Characteristics and Financial Instruments Quiz

Bonds typically do not pay dividends; they provide fixed interest payments.

Coupon rate indicates the annual interest income relative to the bond's face value.

Zero-coupon bonds do not make periodic interest payments; they are sold at a discount.

When interest rates rise, bond prices fall, and vice versa, due to fixed coupon rates.

Callable bonds can be redeemed by the issuer before the bond's scheduled maturity date.

Fluctuations in interest rates pose a risk to bond prices and overall returns.

Junk bonds have lower credit ratings, indicating higher risk and potentially higher returns.

Duration quantifies how bond prices change in response to interest rate fluctuations.

Yield to maturity accounts for both interest and potential capital gains or losses, while coupon rate is the fixed annual interest rate.

Convertible bonds offer the option to convert into common stock, providing potential equity participation.

Current yield focuses on current income, while yield to maturity considers total returns over the bond's life.

Inflation erodes the purchasing power of future bond interest and principal, posing a risk to bond investors.