Bond Investment Quiz

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Questions and Answers

What is the primary difference between borrowing from the bond market and borrowing from a bank for a large reputable company?

There is no significant difference in terms between borrowing from the bond market and borrowing from a bank

Borrowing from the bond market and borrowing from a bank offer the same terms

Borrowing from a bank typically offers better terms than borrowing from the bond market

Borrowing from the bond market typically offers better terms than borrowing from a bank (correct)

What happens to private consumption and private investments when the government borrows from the bond market?

Private consumption falls by the same amount that private investments fall (correct)

Private consumption increases while private investments fall

Private consumption and private investments remain unaffected

Private consumption falls while private investments increase

How does the demand for savings and the interest rate change when the government borrows from the bond market?

Demand for savings increases and interest rate increases (correct)

Demand for savings decreases and interest rate increases

Demand for savings increases and interest rate decreases

Demand for savings decreases and interest rate decreases

What is the relationship between bond ratings and the interest rate charged?

Higher bond ratings result in lower interest rates Signup and view all the answers

How does the presence of collateral affect the interest rate charged for borrowing?

If the borrower has collateral, the interest rate decreases Signup and view all the answers

What is the original maturity period for securities in the capital market?

More than 1 year Signup and view all the answers

What are the primary issuers of securities in the capital market?

Governments are debt issuers, and corporations are stock and bond issuers Signup and view all the answers

What is the key metric for bond investors to measure the yield to maturity?

Duration Signup and view all the answers

Which type of corporate bond has lower ratings and higher interest rates?

Junk bonds Signup and view all the answers

What are used to lower risk and transfer credit risk to others in the bond market?

Credit default swaps Signup and view all the answers

What affected borrowing costs and investment behavior of firms after its introduction in 1982?

Moody's Signup and view all the answers

What measures the weighted average time to receive the bond's cash flows and serves as a risk measure for bond price sensitivity to interest rate changes?

Duration Signup and view all the answers

What led to concerns during the 2008 financial crisis due to its unregulated growth?

Credit default swaps Signup and view all the answers

What type of bond has collateral and is considered to have lower risk?

Secured bonds with collateral Signup and view all the answers

What is the approximate change in the value of the portfolio if the general interest rate rises from 8% to 8.5%?

-$729,583 Signup and view all the answers

What are the risks an investor would face when making an investment in corporate bonds?

Default risk, interest rate risk, exchange rate risk, inflation risk Signup and view all the answers

What is the yield to maturity on a zero-coupon bond with a face value of $1000, priced at $850, and maturing in 4 years?

4.1466% Signup and view all the answers

What drives bond prices?

Market conditions, ratings, age of bond Signup and view all the answers

What do investors think about when investing in bonds?

Relatively low risk vs. equity, dependable cash flows, interest rate risk Signup and view all the answers

What is the effect of a higher coupon rate on the duration of a bond?

Shorter duration Signup and view all the answers

What is the relationship between maturity lengthening and duration?

Duration rises Signup and view all the answers

What is the % change in the price of a bond in relation to its duration and the change in interest rate?

The % change in price of bond = $- ext{duration} imes ext{change in interest rate}$ Signup and view all the answers

What are the risks associated with an investment in municipal and corporate bonds?

Default risk, interest rate risk, exchange rate risk Signup and view all the answers

What type of bonds are tax-free and used for public projects?

Municipal bonds Signup and view all the answers

Which type of bonds are issued by government-sponsored entities?

Agency bonds Signup and view all the answers

What type of bonds protect against inflation but offer lower interest rates?

TIPS Signup and view all the answers

In which type of bonds are restrictive covenants and call provisions common?

Corporate bonds Signup and view all the answers

Which type of bonds have no default risk in the US due to the ability to print money?

Treasury bonds Signup and view all the answers

What type of bonds are automatically taxed?

Registered bonds Signup and view all the answers

Which type of bonds are used for financing operations?

T-bills Signup and view all the answers

Study Notes

Understanding Treasury Bonds, Municipal Bonds, and Corporate Bonds

Treasury issues T-bills, notes, and bonds to finance operations
No default risk in US due to ability to print money
Importance of risk-free rate for company valuations
Interest rate risk increases with longer maturity instruments
In crises, inverse yield curve occurs due to flight to safety
TIPS protect against inflation but offer lower interest rates
Agency bonds are issued by gov. sponsored entities
Municipal bonds are tax-free and used for public projects
Two types of municipal bonds: general obligation and revenue
Corporate bonds vary in face value, interest payment, and risk
Registered bonds are automatically taxed; bearer bonds are not
Restrictive covenants and call provisions are common in corporate bonds

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Description

Test your knowledge of Treasury bonds, municipal bonds, and corporate bonds with this quiz. Explore the differences in risk, taxation, and purposes of these key investment instruments.