#1
What is a bond?
A loan made by an investor to a borrower
ExplanationBonds represent loans from investors to borrowers.
#2
What is meant by the 'maturity' of a bond?
The length of time until the principal amount must be repaid
ExplanationMaturity is the time until the bond's principal is repaid.
#3
What does it mean when bonds are referred to as 'fixed-income securities'?
They offer a fixed rate of return
ExplanationBonds provide a fixed rate of return, hence 'fixed-income securities'.
#4
What is the 'coupon rate' of a bond?
The annual interest rate paid on a bond's face value
ExplanationCoupon rate is the annual interest rate on a bond's face value.
#5
What are 'junk bonds'?
Bonds that are rated below investment grade due to their high risk of default
ExplanationJunk bonds have high default risk and are below investment grade.
#6
What does the 'yield' of a bond represent?
The return an investor will receive by holding the bond to maturity
ExplanationBond yield reflects the return from holding the bond until maturity.
#7
What is the relationship between bond prices and interest rates?
Inversely proportional
ExplanationBond prices and interest rates have an inverse relationship.
#8
What does it mean if a bond is trading at a 'premium'?
It is selling for more than its face value
ExplanationPremium means a bond is selling above its face value.
#9
What is the primary factor that affects a bond's credit risk?
Issuer's financial health
ExplanationCredit risk is influenced by the financial health of the bond issuer.
#10
What is a 'zero-coupon bond'?
A bond that pays no interest
ExplanationZero-coupon bonds don't pay interest; they are sold at a discount.
#11
How does a 'callable bond' differ from a regular bond?
It can be redeemed by the issuer before its maturity date
ExplanationCallable bonds can be redeemed by the issuer before maturity.
#12
Which of the following best describes 'duration' in bond investment?
The measure of a bond's price sensitivity to interest rate changes
ExplanationDuration gauges how bond prices react to interest rate shifts.
#13
What is meant by 'convexity' in bond investing?
The curvature in the relationship between bond prices and yields
ExplanationConvexity describes the curvature in bond price-yield relationship.
#14
What strategy involves buying bonds with different maturities to manage interest rate risk?
Laddering
ExplanationLaddering involves diversifying bond maturities to mitigate interest rate risk.
#15
What does 'negative yield' mean for a bond?
The bondholder will receive less money back than originally invested
ExplanationNegative yield implies the investor receives less than the invested amount.