Podcast
Questions and Answers
Which statement provides the most accurate definition of a bond?
Which statement provides the most accurate definition of a bond?
- A loan to the government or a company that pays investors a fixed rate of return over a specified period. (correct)
- An FDIC-insured investment account.
- Ownership in a company, similar to a stock.
- A sum of money paid regularly to shareholders by a company.
Bonds generally have a higher risk profile compared to stocks.
Bonds generally have a higher risk profile compared to stocks.
False (B)
What does the 'coupon' refer to when discussing bonds?
What does the 'coupon' refer to when discussing bonds?
- The timeframe of the bond before maturity.
- The annual interest rate paid on a bond. (correct)
- The face value of the bond.
- The discounted rate of the bond when purchased.
A bond is a way for investors to diversify their portfolios and generate additional...
A bond is a way for investors to diversify their portfolios and generate additional...
If interest rates rise after you purchase a bond, how does this affect the value of your bond if you decide to sell it before maturity?
If interest rates rise after you purchase a bond, how does this affect the value of your bond if you decide to sell it before maturity?
Which of the following is generally considered the highest bond rating?
Which of the following is generally considered the highest bond rating?
What is a bond fund?
What is a bond fund?
The higher the risk associated with a bond, the _______ likely a corporation might default on paying the investor.
The higher the risk associated with a bond, the _______ likely a corporation might default on paying the investor.
Why might an investor choose to invest in lower-rated bonds?
Why might an investor choose to invest in lower-rated bonds?
What is 'default risk' concerning bonds?
What is 'default risk' concerning bonds?
Flashcards
What is a bond?
What is a bond?
A loan to a government or company that pays investors a fixed rate of return over a specified time.
What is a coupon?
What is a coupon?
The annual interest rate paid on a bond, expressed as a percentage of the face value.
Highest bond rating?
Highest bond rating?
AAA is the highest rating. Bonds are rated by agencies based on their creditworthiness.
Low Bond Rating?
Low Bond Rating?
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What is a bond fund?
What is a bond fund?
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Bonds vs. Stocks Risk?
Bonds vs. Stocks Risk?
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Bond Maturity?
Bond Maturity?
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What is default risk?
What is default risk?
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Higher Interest Rates?
Higher Interest Rates?
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What is Diversification?
What is Diversification?
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Study Notes
- Investing in bonds can diversify a portfolio beyond just stocks
- Bonds can be a useful choice to include in investments
- A bond is a loan to the government or a company
- It pays investors a fixed rate of return over a specified period
- Coupon refers to the annual interest rate paid on a bond
- AAA is the highest bond rating
- Lower-rated bonds typically have a higher coupon
- Riskier bonds usually pay a higher coupon rate
- Default risk increases on riskier bonds
- A bond fund is a mutual fund that invests in a variety of bonds
- Bonds have less risk than stocks, but more risk than a savings account
- Bonds are a way for investors to diversify their portfolios and generate additional income
- A bond gives the company or government funding for new projects or ongoing expenses
- Bonds are considered a less risky investment option than stocks
- By the end of a bond's maturity, the investor will have received the face value of the issued bond and interest payments
- Default risk is the risk that the company or government cannot pay back the investor
- To sell a bond before its maturity date when interest rates are higher, it will likely have to be sold at a discounted price
Main Types of Bonds
- You can buy a corporate bond or a government bond
- Higher risk bonds are less likely to be paid if a corporation defaults
- Interest rates for riskier bonds tend to be higher so that investors are more willing to take on the risk
- Riskier bonds usually come from a corporation that has a low credit rating
Diversification
- Diversification is the spreading of risk
- Asset allocation means the allocation of assets
- Allocating assets is the level of diversifying you do with asset classes
Understanding Yield and Rising Rates
- The ups and downs of the bond market will not impact your investment if you buy a bond and hold it through its maturity date
- The current market's interest rates impact the price of your bond if you decide to sell a bond before its maturity date
- When overall interest rates rise (to 10%), the bond you already own (with 5% coupon rate) becomes less valuable to potential buyers, so its price will lower
- When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes more valuable to potential buyers, so its price will increase
- Generally, the longer the duration of the bond, the higher the chance the bond price may change due to changes in yield
- Someone who is not interested in selling their bond before its maturity date does not have to worry about the current bond market and its impact on the price of their bond
Individual Funds vs Bond Funds
- Most investors choose to invest in bond funds rather than selecting individual bonds when investing in bonds
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