Investment in Bonds

Question 1

A certificate of indebtedness with a fixed interest rate and maturity date. It is a formal and unconditional promise to pay a specified sum of money at a determinable future date and to make periodic interest payments at a stated rate until the principal amount is fully paid.

Answer 1

Bond

Question 2

The face (principal) amount of the bond, which is paid at maturity (also called maturity value or face value).Par Value: The face (principal) amount of the bond, which is paid at maturity (also called maturity value or face value).

Answer 2

Par Value

Question 3

The stated interest rate (generally fixed) paid by the issuer, used as the basis for computing the interest collected by the bondholder (also called the nominal rate).

Answer 3

Coupon Interest Rate

Question 4

The specific date when the bond must be repaid by the issuer.

Answer 4

Maturity Date

Question 5

The date when the bond is issued

Answer 5

Issue Date

Question 6

The rate of return earned on a bond held until maturity (also called the effective rate or market rate). It is used to calculate the actual interest earned by the bondholder.

Answer 6

Yield to Maturity (YTM)

Question 7

Bonds ssued by a government unit.

Answer 7

Government Bonds:

Question 8

Bonds issued by a private corporation.

Answer 8

Commercial Bonds

Question 9

Bonds secured by real property.

Answer 9

Mortgage Bonds

Question 10

Bonds secured by company equipment.

Answer 10

Equipment Trust Bonds

Question 11

Bonds secured by securities invested in by the issuing company.

Answer 11

Collateral Trust Bonds

Question 12

Bonds secured by all free assets of the issuing company, effectively making them unsecured by any specific assets.

Answer 12

Debenture Bonds

Question 13

A bond in which the entire principal matures at one time.

Answer 13

Straight Bonds

Question 14

A bond in which the principal matures in installments.

Answer 14

Serial Bonds

Question 15

A bond which can be exchanged for other securities of the issuing company at the bondholder’s option.

Answer 15

Convertible Bonds

Question 16

A bond which can be called, redeemed, or retired by the issuing company before the maturity date.

Answer 16

Callable or Redeemable Bonds

Question 17

A bond which cannot be called or redeemed before maturity.

Answer 17

Non-Cancellable or Non-Redeemable Bonds

Question 18

A bond which is transferred by mere delivery; bondholders are not registered in the issuer’s books.

Answer 18

Bearer Bonds

Question 19

A bond in which interest coupons are attached to the bond certificate; interest is paid to the holder of the coupon.

Answer 19

Coupon Bonds

Question 20

A bond which is registered in the issuer’s books and transferable upon surrender of the bond certificate.

Answer 20

Registered Bonds

Question 21

A Registered Bond in which interest is paid to any party presenting the interest coupon.

Answer 21

Registered as to Principal Only

Question 22

A Registered Bond in which interest is paid only to the party registered as the bondholder in the issuer’s books.

Answer 22

Registered as to Both Principal and Interest

Question 23

A bond in which no periodic interest payments; issued at a discount, and the value increase until maturity serves as the earned interest.

Answer 23

Zero-Coupon Bonds

Question 24

High-yield bonds issued by companies with low credit ratings, carrying a higher risk of default.

Answer 24

Junk Bonds

Question 25

Refers to the price investors are willing to pay to realize their desired yield or rate of return from the investment. It is calculated as the total present value (PV) of all future cash flows resulting from the bond investment.

Answer 25

Bond Value

Question 26

If a bond is purchased at 100% of the face value, the yield (effective rate) is

Answer 26

equal to the nominal rate of interest.

Question 27

If a bond is purchased below face value, the yield (effective rate) is

Answer 27

higher than the nominal rate of interest.

Question 28

If a bond is purchased above face value, the yield (effective rate) is

Answer 28

lower than the nominal rate of interest.