The Ultimate How Bonds Work Quiz

A business can sell bonds to anyone who wants to buy them, thereby raising the funds that it requires. The company agrees to pay the buyer interest for the life of the bond.

Long-term bonds usually have a higher interest rate (also called the coupon) than short-term ones. The terms of the bond itself determine the interest rate and are clearly spelled out.

Most interest payments are paid out semiannually, but annual, monthly or quarterly interest payments are available, as well. The original amount of the loan or principle is returned to you on the date of maturity.

Whereas a bond is a loan, a stock is actually partial ownership in a company and therefore subject to ups and downs in the financial markets. Most bonds have a fixed interest rate and are usually a less risky investment.

Floating-rate bonds are more volatile than fixed-rate bonds, whose interest rate is just that -- fixed. The interest rate on floating-rate bonds can fluctuate according to market conditions.

If you want to sell a bond at a price lower than its face value, you will be selling at a discount. If you sell at a price higher than its face value, you will be selling at a premium.

The United States government issues T-bills, T-notes and treasury bonds to help them pay their bills. In some cases, they are tax-exempt.

U.S. government issued T-bills mature in less than one year, T-notes mature in one to 10 years and treasury bonds mature in 10 years or more.

States, cities and counties may all issue municipal bonds (or munis) to pay for different projects including hospitals, bridges, schools and power plants. If you purchase municipal bonds, you will be exempt from paying federal income tax on their interest.

To determine the financial situation of a given company, check out things like cash flow, debt, liquidity and the company's business plan.

You may have heard of Moody's Investors Service and Standard & Poor's. Their experts research a company's financial situation to determine a bond rating for that company.

Safer A-rated bonds (like U.S. government bonds) are usually low-yield. A D-rating represents a high-risk bond.

Individuals invest in junk bonds, because companies promise high returns to entice investors to buy them. Be aware that junk bonds are usually considered one of the riskiest investments around.

The lifetime of a bond can be anywhere from one month to 50 years, depending on its type.

Callability is the right of a company to buy back a bond before it matures. This usually happens when interest rates are falling.

People are interested in putting their bonds during periods when interest rates are rising, so they can take their money and invest it where it will earn a better rate.

To convert bonds into stocks, you need to have bought convertible bonds in the first place, which allow you to convert to stock at a previously specified time and price.

Secured bonds are backed by collateral. Money or assets have been set aside to cover the bond's value in the event of the issuing company's bankruptcy.

Unsecured bonds or debentures are not secured by any collateral, but are backed only by the reliability of the issuing company or agency.

A business might borrow money to fund its operations, to expand into new markets or to introduce an innovative product to the market. Bond issues are an accepted way for a business to borrow money.