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Let’s Bond
How much do you know about bonds? Read to find out
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Bond Basics
Do you know the basic principals of bonds? In this edition, we’ll focus on corporate bonds and the terms you need to know.
Question 1
What does a bond represent?
A. Ownership in the company
B. Lending money to the company
Question 2
Which answer is correct?
A. A bond pays periodic interest to the bondholder, typically at a fixed rate, until it reaches its maturity date, at which point the principal is repaid to the investor.
B. A bond is a financial instrument that pays variable interest based on the performance of the stock market.
C. A bond is a short-term financial instrument with a maturity of less than a year.
D. A bond is a certificate that grants the holder the right to vote in company decisions.
Question 3
Which answer is incorrect?
A. Bonds are typically considered lower-risk investments compared to stocks, as they provide regular income and have a predetermined maturity date when the initial investment is returned.
B. The yield of a bond represents the return an investor can expect to earn, which is influenced by the bond's coupon rate, price, and time to maturity.
C. A bond is a contract that obligates the borrower to pay interest only if the company makes a profit.
Question 4
Which one of these choices is not a bond rating agency
A. Moody’s
B. Nelson
C. S&P
D. Fitch
Question 5
When bonds are being bought in the secondary market and the price is increasing, what happens to the yield?
A. The yield also increases
B. The yield decreases
C. The yield stays the same
We’ll have the answers after the break
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Answers
Question 1
Answer: B
A simple answer to start, hopefully this one is clear. A corporate bond is a debt security issued by a corporation to raise capital. When investors purchase a corporate bond, they are effectively lending money to the issuing company in exchange for periodic interest payments (known as coupon payments) and the return of the bond's face value (principal) when the bond matures.
Question 2
Answer A:
This one was a little more difficult. Bonds usually have a fixed rate of interest though some have variable rate interest tied to some sort of index. But for the vast majority of corporate bonds, the bondholder gives the principal to the company when they buy the bond. The company who issued the bond, known as the issuer, make quarterly, semi-annual, or annual payments to the bondholder according to the interest rate with the principal being fully paid back at the end of maturity.
Question 3
Answer: C
Bonds have a stated principal and interest rate. Stock returns are not guaranteed and even dividend paying stocks can choose to take away their dividends. Though bonds do contain other types of risk, the most pressing risk for bonds is the event of a default by the bond issuer.
Question 4
Answer: B
Nelson is not a bond rating agency. A bond rating agency is a company that assesses the creditworthiness of bond issuers and assigns ratings to their bonds. These ratings indicate the likelihood that the bond issuer will be able to meet its financial obligations, such as making interest payments and repaying the principal upon maturity.
Question 5
Answer: B
As a bond’s price increases, the fixed coupon payments represent a smaller percentage of the higher price, leading to a lower yield. This inverse relationship ensures that bond yields adjust to reflect changes in market conditions and investor demand.
In other news
Federal Reserve Chair Jerome Powell announced, “The time has come for policy to adjust,” presumably indicating that the Federal Reserve will lower interest rates at their next meeting in September. Interest rates currently sit at a 23 year high.
You don’t make progress by standing on the sidelines, whimpering and complaining. You make progress by implementing ideas.
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