A Financial Literacy Quiz on Bond Investing
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“A Financial Literacy Quiz on Bond Investing.”
Bond investing can feel intimidating to investors based on terms like yields, coupon rates, par value, maturity, yield curves etc. This financial literacy quiz tests your knowledge on some bond investing basics.
What is a bond?
A) A type of equity
B) A loan made by an investor to a borrower
C) A form of currency
D) A type of mutual fundWhat is a bond’s coupon rate?
A) The annual interest rate paid on a bond, based on its face (or par) value
B) The discount rate on a bond
C) The rate at which the bond's price increases
D) A grocery store bond offering couponsWhat is a bond’s yield?
A) The price of a bond
B) The original amount invested in a bond
C) The annual rate of return on a bond, relative to its purchase price
D) The length of time until a bond maturesWhat is a bond's face (or par) value?
A) The bond’s human-like characteristics
B) The price of the bond on the secondary market, either at a premium or discount
C) The amount of money the bond will be worth at maturity
D) The number of bonds issuedWhat does it mean for a bond to mature?
A) The bond is due for interest payment
B) The bond can be sold on the secondary market
C) The bond is at its highest price
D) The bond's principal amount is due to be paid back to the investorWhat is a 10-year Treasury note?
A) A bond issued by the U.S. government with a ten-year maturity
B) A stock that matures in ten years
C) A ten-year plan for municipal spending
D) A special type of bank accountHow are Treasury bills, notes, and bonds different from each other?
A) They are issued by different governments
B) They are extremely risky investments
C) They have different maturity lengths and corresponding yields
D) They are different types of stocksHow do you purchase a Treasury Bill (T-Bill)?
A) Wait for a sale at the department store
B) Buy it directly from the U.S. Treasury or on a brokerage platform at a discounted price which is less than its face value
C) Buy it at par value
D) Buy it above par valueHow do Treasury Notes (T-Notes) and Treasury Bonds (T-Bonds) pay investors interest?
A) They pay interest at maturity
B) They pay interest every 6 months
C) They don't pay interest
D) They pay interest annuallyWhat happens to bond prices when interest rates go up?
A) Bond prices go up
B) Bond prices go down
C) Bond prices remain the same
D) Bond prices fluctuate unpredictablyWhat happens to bond prices when interest rates go down?
A) Bond prices go up
B) Bond prices go down
C) Bond prices remain the same
D) Bond prices fluctuate unpredictablyWould existing bondholders typically prefer interest rates to go up or down?
A) Up, because this would make their existing bonds less valuable
B) Down, because this would make their existing bonds more valuable
C) Bond investors have no preference regarding interest rates
D) Bond investors prefer investing in James Bond moviesWould new bond investors typically want a higher or lower interest rate environment?
A) Higher, because this would mean a higher yield on the bonds they buy
B) Lower, because this would mean a lower yield on the bonds they buy
C) New bond investors have no preference regarding interest rates
D) New bond investors prefer investing in James Bond moviesHow does the Federal Reserve impact bond investors?
A) By changing interest rates, which affects bond prices and yields
B) By funding new James Bond movies
C) By buying and selling stocks
D) The Federal Reserve has no impact on bond investorsWhat is “credit risk” in relation to bond investing?
A) The risk that the issuer will default on their obligations and not pay back investors
B) The risk of the bond's price decreasing
C) The risk of interest rates increasing
D) The risk that the bond will not be sold at maturityWhat is “duration risk” in relation to bond investing?
A) The risk of a bond being called
B) The risk that James Bond won’t survive through the end of a Bond movie
C) The risk that the bond will not be sold at maturity
D) A measurement of how sensitive the price of a bond is to a change in interest rates that factors in a bond's maturity, yield, coupon and call featuresWhat is a junk bond?
A) A bond that has defaulted
B) A bond that has a high yield and correspondingly high risk of not paying back investors
C) A bond that is no longer being traded
D) A bond that was issued by a company that has gone bankruptWhat is a corporate bond?
A) A bond issued by a corporation
B) A bond issued by the government
C) A bond that can be converted into stock
D) A bond that is purchased by a corporationWhat is a municipal bond?
A) A bond issued by a corporation
B) A bond issued by a city or other local government, that may offer tax exempt interest
C) A bond issued by the federal government
D) A bond that is sold at a discountWhat does an inverted yield curve in the bond market typically signal?
A) The Federal Reserve is throwing a party
B) Investors expect long-term interest rates to rise
C) Investors expect interest rates are likely to fall in the future due to the potential of an upcoming recession
D) The economy is overheating
Answers: 1-B, 2-A, 3-C, 4-C, 5-D, 6-A, 7-C, 8-B, 9-B, 10-B, 11-A, 12-B, 13-A, 14-A, 15-A, 16-D, 17-B, 18-A, 19-B, 20-C.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.