The Ultimate How Bonds Work Quiz

Staff

4 Min Quiz

When a business needs more money than a bank loan can provide, one solution is to issue:

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.

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Long-term bonds usually have _____ interest rate than short-term bonds.

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.

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Interest payments on bonds are usually paid 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.

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When you buy stock in a company, you are actually buying:

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.

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The interest rate on floating-rate bonds _____as a result of market conditions.

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.

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When you sell a bond at lower than its face value, you are selling it at:

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.

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The United States government has issued bonds in the past to fund:

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.

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Treasury bonds take more than _____years to mature.

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.

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Which of the following might be funded by municipal bonds?

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.

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What's the best way to determine if buying a corporate bond is financially risky?

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

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Which of the following companies offer a rating service to help you determine a company's financial status?

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.

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Which of the following ratings represents a low-risk bond?

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

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_____ bonds are considered one of the riskiest types of bonds.

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.

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What is the typical life of a bond?

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

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The right to call in a bond before its date of maturity is called:

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

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Which provision allows a buyer to sell back a bond before its maturity date?

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.

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Which type of bond can be converted into stock in the issuing company?

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.

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Which type of bonds is backed by collateral?

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.

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Unsecured bonds are also called:

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

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A business might issue bonds to raise money to:

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.

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About This Quiz

Ever wonder how large companies raise capital when the bank won't loan them any more money? One of the most accepted ways of borrowing money in the financial world is to issue bonds. There are many different types of investment bonds, but our bond quiz will teach you everything you need to know and more.

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