Bond Investments: Risks and Benefits
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Questions and Answers

What is the main purpose of issuing bonds in the bond market?

  • To raise capital for various purposes (correct)
  • To reduce interest rates
  • To finance budget surpluses
  • To increase the money supply
  • What is the primary difference between the money market and the bond market?

  • The interest rates offered
  • The type of debt instruments traded
  • The maturity period of debt securities (correct)
  • The credit rating of issuers
  • What is the term for the periodic interest payments made to bondholders?

  • Coupons (correct)
  • Dividends
  • Yield
  • Interest rate
  • What is the role of the bondholder in a bond transaction?

    <p>Lender to the issuer</p> Signup and view all the answers

    What is the term for the initial amount collected by the issuer when issuing a bond?

    <p>Face value</p> Signup and view all the answers

    What is the term for the entity that issues a bond?

    <p>Issuer</p> Signup and view all the answers

    Which type of investor is likely to invest in bonds to hedge against interest rate risk?

    <p>Corporations</p> Signup and view all the answers

    What is the primary reason for central banks to invest in government bonds?

    <p>To manage their foreign exchange reserves</p> Signup and view all the answers

    Which of the following is a characteristic of bonds issued by high-quality corporate issuers?

    <p>Lower risk compared to equities</p> Signup and view all the answers

    What is the likely effect on the price of a bond when interest rates rise?

    <p>The price of the bond will fall</p> Signup and view all the answers

    What is the primary benefit of bond investments for retirees or those seeking regular cash flow?

    <p>Income generation</p> Signup and view all the answers

    Which of the following types of bonds is most sensitive to changes in interest rates?

    <p>Longer-maturity bonds</p> Signup and view all the answers

    Which type of investor is likely to invest in bonds for regulatory compliance purposes?

    <p>Banks and financial institutions</p> Signup and view all the answers

    What is the primary risk associated with bonds issued by companies with lower credit ratings?

    <p>Credit risk</p> Signup and view all the answers

    What is the primary reason for individual investors to invest in bond mutual funds or ETFs?

    <p>To generate income and preserve capital</p> Signup and view all the answers

    What is the likely effect on the real return of a bond when inflation rises?

    <p>The real return will decrease</p> Signup and view all the answers

    Why may an investor in a bond issued by a smaller company face liquidity risk?

    <p>Because the bond has a limited number of buyers in the secondary market</p> Signup and view all the answers

    What is the benefit of a bond's price increasing due to a decline in interest rates or an improvement in the credit quality of the issuer?

    <p>It provides capital gains for the investor</p> Signup and view all the answers

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