11 - Bonding and Insurance

Question 1

is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Answer 1

bond

Question 2

are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities.

Answer 2

Bonds

Question 3

Owners of bonds are called____________

Answer 3

debt holders, or creditors, of the issuer

Question 4

is the money amount the bond will be worth at its maturity, and is also the reference amount the bond issuer uses when calculating interest payments.

Answer 4

Face value

Question 5

is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage

Answer 5

Coupon rate

Question 6

are the dates on which the bond issuer will make interest payments.

Answer 6

Coupon date

Question 7

Typical intervals at Coupon dates

Answer 7

annual or semi-annual coupon payments.

Question 8

is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond.

Answer 8

Maturity date

Question 9

is the price at which the bond issuer originally sells the bonds.

Answer 9

Issue price

Question 10

are issued by companies.

Answer 10

Corporate Bond

Question 11

are issued by states and municipalities. ______ bonds can offer tax-free coupon income for residents of those municipalities.

Answer 11

Municipal Bonds

Question 12

(more than 10 years to maturity), Notes (1-10 years maturity) and Bills (less than one year to maturity) are collectively referred to as simply “Treasuries.”

Answer 12

Treasury Bonds

Question 13

do not pay out regular coupon payments, and instead are issued at a discount and their market price eventually converges to face value upon maturity. The discount a ________bond sells for will be equivalent to the yield of a similar coupon bond.

Answer 13

Zero-coupon bonds

Question 14

are debt instruments with an embedded call option that allows bondholders to convert their debt into stock (equity) at some point if the share price rises to a sufficiently high level to make such a conversion attractive.

Answer 14

Convertible bonds

Question 15

are callable, meaning that the issuer can call back the bonds from debt holders if interest rates drop sufficiently. These bonds typically trade at a premium to non-callable debt due to the risk of being called away and also due to their relative scarcity in the bond market. Other bonds are putable, meaning that creditors can put the bond back to the issuer if interest rates rise sufficiently.

Answer 15

corporate bonds

Question 16

The majority of corporate bonds in today’s market are so-called____________, with no embedded options and a face value that is paid immediately on the maturity date.

Answer 16

bullet bonds

Question 17

is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Answer 17

Insurance

Question 18

are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.

Answer 18

Insurance policies

Question 19

Three Important Components of Insurance Policies

Answer 19

1. Premium
2. Policy Limit
3. Deductible

Question 20

the specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time

Answer 20

Premium

Question 21

is the maximum amount an insurer will pay under a policy for a covered loss.

Answer 21

Policy limit

Question 22

is a specific amount the policy-holder must pay out-ofpocket before the insurer pays a claim.

Answer 22

Deductible

Question 23

Types of Insurance

Answer 23

1. Life Insurance
2. Health Insurance
3. Long-term Disability Coverage
4. Auto Insurance

Question 24

Characteristics of Insurance

Answer 24

 Sharing of Risk 
 Co-operative Device 
 Value of Risk 
 Payment and Contingency
  Amount of Payment
  Large Number of Insured Persons 
 Insurance is not a gambling

Question 25

Varieties of Bonds

Answer 25

• Zero-coupon bonds
• Convertible bonds
• corporate bond
• bullet bond

Question 26

Three Main Categories/types of Bonds

Answer 26

• Corporate Bond
• Municipal Bonds
• Treasury Bond

Question 27

Characteristic of Bonds

Answer 27

• Face value
• Coupon rate
• Coupon dates
• Maturity date
• Issue price