Bond Investments Quiz

10 Questions

What is the most important criterion when investing in bonds?

The credit rating of the issuer

What is the main benefit of investing in bonds?

The ability to diversify one's investment portfolio

What is the difference between sovereign bonds and corporate bonds?

Sovereign bonds are issued by states to cover their financing needs, while corporate bonds are issued by companies.

What is the primary risk associated with investing in bonds?

Default risk

What happens to the price of a bond if interest rates increase?

The price decreases

What is the yield to maturity?

The potential yield of a bond if held until maturity

What is the difference between high yield bonds and investment grade bonds?

High yield bonds have a higher yield than investment grade bonds.

What are junk bonds?

Bonds that have a low credit rating

What is the actuarial rate of return?

The actual rate of return on a bond

How is the yield to maturity calculated?

Using the coupon rate and the bond's current price

Study Notes

Bonds are a loan issued by a State, local authority, or company to finance economic activity or development.
The bond issuer undertakes to repay its loan, and the most important criterion when investing in bonds is the ability of the issuer to repay its debt.
Subscribing to a bond amounts to granting a loan at a certain rate over a specific period, and in return, the investor receives interest paid periodically.
Bonds are the most common category of so-called “fixed income” financial assets, and are also the most traded assets in the world.
Bonds have a specific lexicon, including nominal value, issue price, price of the bond, maturity, coupon, current yield, actuarial yield, and sensitivity.
Before maturity, the value of a bond varies inversely with interest rates: it rises if interest rates fall and vice versa.
There are different types of bonds that can be differentiated according to the type of issuer, terms of interest payment, or depending on the life of the bond.
Sovereign bonds are issued by states to cover their medium and long-term financing needs, while corporate bonds are issued by companies.
The bond market is one of the most important compartments of the planet, representing hundreds of billions of euros and daily exchanges exceeding 10,000 billion euros/day.
Analysts predict that 2023 will be the year of bonds, with fixed income being favored due to the macroeconomic environment, a possible risk of recession, and a peak in interest rates.
Corporate bonds are debt securities that offer higher yields than government bonds due to higher risk.
There are different types of bonds, including fixed rate, variable rate, inflation-indexed, zero-coupon, and convertible bonds.
Bonds can be purchased directly or indirectly through funds and Sicavs.
The bond market is split between a primary market and a secondary market.
The benefits of bonds include fixed and regular income, priority over shareholders in the event of default, and diversification of investment portfolio.
Risks associated with bonds include default risk, interest rate risk, liquidity risk, inflation risk, and exchange risk.
The price of a bond decreases if interest rates increase.
High yield bonds are riskier than investment grade bonds.
Junk bonds are highly speculative bonds.
Rating agencies assign ratings to financial products, including bonds, based on the issuer's economic and financial situation. Bond is below par if quoted below issue price after rise in rates. Bond purchased in 2022 with interest coupon of 5.30% and price of 101.55%. Bond issued in 2020 and matures in 2027, with residual maturity of 5 years. Coupon yield calculated to be 5.22%. Bond purchased at a price higher than 100%, resulting in a slight loss on the price. Price difference amounts to 1.55. Actuarial rate of return calculated using coupon yield and price difference. Actuarial rate of return on the bond is 4.91%. Yield to maturity is the actual rate of return on the bond. Yield to maturity must be calculated using coupon yield and price difference.