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Questions and Answers
What type of bond is considered to be very low-risk?
What type of bond is considered to be very low-risk?
Which type of bond is issued by companies to raise capital?
Which type of bond is issued by companies to raise capital?
Which type of bond is exempt from federal income tax and state taxes?
Which type of bond is exempt from federal income tax and state taxes?
What type of bond can be converted into a predetermined number of shares of the issuer's common stock?
What type of bond can be converted into a predetermined number of shares of the issuer's common stock?
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Which type of bond does not make regular interest payments?
Which type of bond does not make regular interest payments?
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What type of bond is issued by a foreign entity in the US market?
What type of bond is issued by a foreign entity in the US market?
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What is the primary difference between Investment Grade and Junk Bonds?
What is the primary difference between Investment Grade and Junk Bonds?
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Which measure of duration takes into account the bond's yield?
Which measure of duration takes into account the bond's yield?
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What type of bond is often used as a benchmark for other bonds?
What type of bond is often used as a benchmark for other bonds?
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What is the purpose of central banks purchasing government bonds?
What is the purpose of central banks purchasing government bonds?
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What is a measure of the curvature of the bond's price-yield relationship?
What is a measure of the curvature of the bond's price-yield relationship?
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Which type of bond is issued by local governments and municipalities to finance infrastructure projects?
Which type of bond is issued by local governments and municipalities to finance infrastructure projects?
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What is the main difference between a coupon yield and a current yield?
What is the main difference between a coupon yield and a current yield?
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What is the role of credit rating agencies?
What is the role of credit rating agencies?
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What is a yield curve?
What is a yield curve?
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What is the primary reason why high-yield bonds offer higher yields to investors?
What is the primary reason why high-yield bonds offer higher yields to investors?
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Study Notes
Types of Bonds
Government Bonds
- Issued by governments to finance their activities
- Considered to be very low-risk investments
- Examples:
- U.S. Treasury bonds (T-bonds)
- German bunds
- Japanese government bonds
Corporate Bonds
- Issued by companies to raise capital for various purposes
- Carry a higher level of risk compared to government bonds
- Can offer higher returns to compensate for the increased risk
- Examples:
- High-yield bonds (junk bonds)
- Investment-grade bonds
Municipal Bonds
- Issued by local governments, cities, or states to finance infrastructure projects
- Interest earned is often exempt from federal income tax and state taxes
- Examples:
- General obligation bonds
- Revenue bonds
International Bonds
- Issued by governments or companies in foreign markets
- Can be denominated in a foreign currency
- Examples:
- Eurobonds
- Samurai bonds (issued in Japan)
- Yankee bonds (issued in the US by foreign entities)
High-Yield Bonds
- Issued by companies with lower credit ratings
- Offer higher yields to compensate for the increased credit risk
- Also known as "junk bonds"
Convertible Bonds
- Can be converted into a predetermined number of shares of the issuer's common stock
- Offer a lower yield compared to traditional bonds
- Provide the potential for capital appreciation
Zero-Coupon Bonds
- Do not make regular interest payments
- Sold at a discount to their face value
- Redeemed at face value at maturity
- Examples:
- U.S. Treasury bills
- Commercial paper
Government Bonds
- Issued by governments to finance their activities
- Considered to be very low-risk investments
- Examples include U.S. Treasury bonds (T-bonds), German bunds, and Japanese government bonds
Corporate Bonds
- Issued by companies to raise capital for various purposes
- Carry a higher level of risk compared to government bonds
- Can offer higher returns to compensate for the increased risk
- Include high-yield bonds (junk bonds) and investment-grade bonds
Municipal Bonds
- Issued by local governments, cities, or states to finance infrastructure projects
- Interest earned is often exempt from federal income tax and state taxes
- Examples include general obligation bonds and revenue bonds
International Bonds
- Issued by governments or companies in foreign markets
- Can be denominated in a foreign currency
- Examples include Eurobonds, Samurai bonds (issued in Japan), and Yankee bonds (issued in the US by foreign entities)
High-Yield Bonds
- Issued by companies with lower credit ratings
- Offer higher yields to compensate for the increased credit risk
- Also known as "junk bonds"
Convertible Bonds
- Can be converted into a predetermined number of shares of the issuer's common stock
- Offer a lower yield compared to traditional bonds
- Provide the potential for capital appreciation
Zero-Coupon Bonds
- Do not make regular interest payments
- Sold at a discount to their face value
- Redeemed at face value at maturity
- Examples include U.S. Treasury bills and commercial paper
Types of Bonds
- Government bonds are issued by governments to finance their activities, such as U.S. Treasury bonds.
- Corporate bonds are issued by companies to raise capital, such as Apple bonds.
- Municipal bonds are issued by local governments and municipalities to finance infrastructure projects.
- High-yield bonds are issued by companies with lower credit ratings, offering higher yields to compensate for higher default risk.
- International bonds are issued by governments or companies in foreign currencies, such as Eurobonds.
- Convertible bonds can be converted into a predetermined number of shares of the issuer's common stock.
- Zero-coupon bonds do not make regular interest payments, instead offering a lump sum at maturity.
Bond Yields
- Coupon yield is the annual interest rate paid by the bond issuer, expressed as a percentage.
- Current yield is the total return on investment, including coupon payments and capital gains or losses.
- Yield to maturity is the total return on investment if the bond is held until maturity.
- The yield curve is a graph showing the relationship between bond yields and their maturities.
Credit Rating
- Credit rating agencies, such as Moody's and Standard & Poor's, assess the creditworthiness of bond issuers.
- Credit ratings are scores assigned to bond issuers, indicating their likelihood of default, ranging from AAA (highest) to D (lowest).
- Investment grade bonds have high credit ratings, considered low-risk investments.
- Junk bonds have low credit ratings, considered high-risk investments.
Bond Duration
- Duration is a measure of a bond's sensitivity to changes in interest rates.
- Macaulay duration is the weighted average of the times until each cash flow is received.
- Modified duration is a measure of duration that takes into account the bond's yield.
- Convexity is a measure of the curvature of the bond's price-yield relationship.
Government Bonds
- Treasury bonds are issued by national governments, such as U.S. Treasury bonds.
- Gilts are issued by the UK government.
- Bunds are issued by the German government.
- Government bond yields are used as a benchmark for other bonds, such as the 10-year Treasury yield.
- Central banks often purchase government bonds as part of monetary policy, such as quantitative easing.
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Description
This quiz covers the basics of government and corporate bonds, including their characteristics, risks, and examples.
