Bond Markets MCQs
What is the primary purpose of a bond?
A) To provide equity ownership
B) To raise capital through loans
C) To trade in commodities
D) To create a savings account
Answer: B) To raise capital through loans
Which of the following is a type of bond issued by a corporation?
A) Treasury bond
B) Municipal bond
C) Corporate bond
D) Government bond
Answer: C) Corporate bond
What does the term “face value” of a bond refer to?
A) The price at which the bond is sold
B) The interest rate paid by the bond
C) The amount paid back to the bondholder at maturity
D) The market value of the bond
Answer: C) The amount paid back to the bondholder at maturity
Which of the following is a characteristic of a zero-coupon bond?
A) It pays interest periodically
B) It is issued at a premium
C) It is sold at a discount and matures at face value
D) It has a floating interest rate
Answer: C) It is sold at a discount and matures at face value
What does the term “yield to maturity” (YTM) represent?
A) The annual interest payment of a bond
B) The total return an investor can expect if the bond is held until maturity
C) The difference between the bond’s purchase price and face value
D) The bond’s current market price
Answer: B) The total return an investor can expect if the bond is held until maturity
Which type of bond is considered to have the lowest credit risk?
A) Corporate bond
B) Municipal bond
C) Treasury bond
D) High-yield bond
Answer: C) Treasury bond
What is a bond’s coupon rate?
A) The rate at which the bond is issued
B) The interest rate paid by the bond
C) The rate of return upon maturity
D) The bond’s market price
Answer: B) The interest rate paid by the bond
What is a callable bond?
A) A bond that can be exchanged for equity
B) A bond that can be redeemed before maturity at the issuer’s discretion
C) A bond with no fixed maturity date
D) A bond that offers a floating interest rate
Answer: B) A bond that can be redeemed before maturity at the issuer’s discretion
What does “duration” measure in a bond?
A) The time until the bond matures
B) The interest rate sensitivity of the bond’s price
C) The bond’s coupon payment schedule
D) The bond’s credit rating
Answer: B) The interest rate sensitivity of the bond’s price
Which of the following is a feature of a convertible bond?
A) It can be exchanged for a fixed number of shares of the issuer’s stock
B) It pays no interest
C) It is issued at a premium
D) It has a variable coupon rate
Answer: A) It can be exchanged for a fixed number of shares of the issuer’s stock
What does “credit risk” refer to in the context of bonds?
A) The risk that interest rates will rise
B) The risk that the issuer will default on interest or principal payments
C) The risk associated with the bond’s duration
D) The risk that the bond will be called before maturity
Answer: B) The risk that the issuer will default on interest or principal payments
Which bond has a fixed coupon rate and no maturity date?
A) Zero-coupon bond
B) Perpetual bond
C) Callable bond
D) Convertible bond
Answer: B) Perpetual bond
What is the purpose of bond rating agencies?
A) To determine the market price of bonds
B) To assess the credit quality of bond issuers
C) To set interest rates for bonds
D) To create new bond issues
Answer: B) To assess the credit quality of bond issuers
What is the primary risk associated with long-term bonds compared to short-term bonds?
A) Market risk
B) Credit risk
C) Interest rate risk
D) Liquidity risk
Answer: C) Interest rate risk
What is a bond’s “spread”?
A) The difference between the bond’s coupon rate and the market interest rate
B) The difference between the bond’s face value and its current price
C) The difference between the yield on the bond and a benchmark yield
D) The difference between the bond’s maturity date and the issue date
Answer: C) The difference between the yield on the bond and a benchmark yield
Which type of bond is issued by a city or state government?
A) Treasury bond
B) Corporate bond
C) Municipal bond
D) Agency bond
Answer: C) Municipal bond
What is an “agency bond”?
A) A bond issued by a government agency or government-sponsored entity
B) A bond issued by a corporation
C) A bond issued by a municipality
D) A bond issued by a foreign government
Answer: A) A bond issued by a government agency or government-sponsored entity
What is the “current yield” of a bond?
A) The bond’s coupon rate
B) The bond’s yield to maturity
C) The annual coupon payment divided by the bond’s current market price
D) The bond’s yield spread over Treasuries
Answer: C) The annual coupon payment divided by the bond’s current market price
Which of the following bonds is most likely to be subject to call risk?
A) Treasury bond
B) Municipal bond
C) Callable bond
D) Zero-coupon bond
Answer: C) Callable bond
What is a “discount bond”?
A) A bond sold at a price above its face value
B) A bond sold at its face value
C) A bond sold at a price below its face value
D) A bond with no interest payments
Answer: C) A bond sold at a price below its face value
What is the primary difference between a “bond” and a “note”?
A) Bonds have longer maturities than notes
B) Notes have lower credit risk than bonds
C) Bonds are issued by corporations, while notes are issued by governments
D) Bonds have floating interest rates, while notes have fixed rates
Answer: A) Bonds have longer maturities than notes
What is a “floating-rate bond”?
A) A bond with an interest rate that changes periodically based on market conditions
B) A bond that is sold at a discount
C) A bond that has a fixed interest rate
D) A bond with no interest payments
Answer: A) A bond with an interest rate that changes periodically based on market conditions
Which type of bond is typically exempt from federal income tax?
A) Corporate bond
B) Treasury bond
C) Municipal bond
D) Agency bond
Answer: C) Municipal bond
What is the “yield curve”?
A) A graph showing the relationship between bond yields and maturity dates
B) A chart showing the historical prices of bonds
C) A diagram of bond credit ratings
D) A graph of bond issuance volumes over time
Answer: A) A graph showing the relationship between bond yields and maturity dates
What is meant by “bond laddering”?
A) Investing in bonds of different maturities to manage interest rate risk
B) Selling bonds short to profit from price declines
C) Creating a portfolio of bonds with the same maturity date
D) Buying only high-yield bonds
Answer: A) Investing in bonds of different maturities to manage interest rate risk
What is a “convertible bond”?
A) A bond that can be converted into a fixed number of shares of the issuer’s stock
B) A bond that can be redeemed before maturity
C) A bond that has no fixed maturity date
D) A bond that offers a floating interest rate
Answer: A) A bond that can be converted into a fixed number of shares of the issuer’s stock
What does the term “coupon” refer to in a bond?
A) The principal repayment at maturity
B) The bond’s market value
C) The periodic interest payment to the bondholder
D) The bond’s issue price
Answer: C) The periodic interest payment to the bondholder
Which of the following bonds typically has the highest credit risk?
A) Government bond
B) Municipal bond
C) Corporate bond
D) High-yield bond
Answer: D) High-yield bond
What is a “treasury inflation-protected security” (TIPS)?
A) A government bond that adjusts its principal value with inflation
B) A bond issued by a corporation
C) A bond with a fixed coupon rate
D) A short-term municipal bond
Answer: A) A government bond that adjusts its principal value with inflation
Which type of bond usually has a higher yield?
A) Investment-grade bond
B) High-yield bond
C) Treasury bond
D) Municipal bond
Answer: B) High-yield bond
What is the “Macaulay duration” of a bond?
A) The time until the bond matures
B) The weighted average time until the bond’s cash flows are received
C) The bond’s coupon payment schedule
D) The bond’s yield to maturity
Answer: B) The weighted average time until the bond’s cash flows are received
What is a “stripped bond”?
A) A bond where the coupon payments and principal are sold separately
B) A bond with no maturity date
C) A bond issued at a premium
D) A bond that can be converted into stock
Answer: A) A bond where the coupon payments and principal are sold separately
Which bond would typically have a higher yield, a 5-year or a 30-year bond?
A) 5-year bond
B) 30-year bond
C) They have the same yield
D) It depends on the issuer’s credit rating
Answer: B) 30-year bond
What does “senior” mean in the context of a senior bond?
A) It is the highest-rated bond in a company’s debt structure
B) It has priority over other debt in the event of liquidation
C) It has a lower coupon rate than other bonds
D) It is convertible into stock
Answer: B) It has priority over other debt in the event of liquidation
What is a “junk bond”?
A) A bond with a high credit rating
B) A bond with a low credit rating and high yield
C) A bond with no interest payments
D) A bond issued by a government agency
Answer: B) A bond with a low credit rating and high yield
Which of the following describes a bond with a “fixed-rate” coupon?
A) The coupon payments change based on market interest rates
B) The coupon payments remain constant throughout the life of the bond
C) The bond does not make any coupon payments
D) The bond’s coupon rate adjusts for inflation
Answer: B) The coupon payments remain constant throughout the life of the bond
What is the “yield spread” in relation to bonds?
A) The difference between the bond’s coupon rate and its yield to maturity
B) The difference in yields between bonds with different credit ratings
C) The difference between the bond’s face value and its purchase price
D) The bond’s current market price compared to its issue price
Answer: B) The difference in yields between bonds with different credit ratings
Which bond type is typically issued by a government to raise funds for specific projects or expenditures?
A) Treasury bond
B) Corporate bond
C) Municipal bond
D) Agency bond
Answer: C) Municipal bond
What is “reinvestment risk” in the context of bonds?
A) The risk that the issuer will not be able to make interest payments
B) The risk that the bond will be called before maturity
C) The risk that coupon payments will have to be reinvested at lower interest rates
D) The risk of changes in the bond’s credit rating
Answer: C) The risk that coupon payments will have to be reinvested at lower interest rates
What is the “indenture” of a bond?
A) The agreement that outlines the terms and conditions of the bond issue
B) The amount of interest paid on the bond
C) The bond’s market price
D) The bond’s face value
Answer: A) The agreement that outlines the terms and conditions of the bond issue
What does “inverted yield curve” indicate?
A) Short-term interest rates are higher than long-term rates
B) Long-term interest rates are higher than short-term rates
C) The bond’s coupon rate is higher than its yield to maturity
D) The bond’s face value is lower than its current price
Answer: A) Short-term interest rates are higher than long-term rates
Which of the following would generally be a characteristic of a high-yield bond?
A) Low risk of default
B) High interest payments
C) Low coupon rate
D) Long-term maturity with fixed rates
Answer: B) High interest payments
What does a “negative yield” on a bond mean?
A) The bond’s price is lower than its face value
B) The bond’s interest payments are higher than its purchase price
C) The investor will lose money if the bond is held to maturity
D) The bond’s yield is higher than its coupon rate
Answer: C) The investor will lose money if the bond is held to maturity
What is a “puttable bond”?
A) A bond that can be redeemed by the bondholder before maturity
B) A bond that can be converted into stock
C) A bond that is callable by the issuer
D) A bond with a variable interest rate
Answer: A) A bond that can be redeemed by the bondholder before maturity
Which of the following best describes a “bullet bond”?
A) A bond with a single payment of principal and interest at maturity
B) A bond with periodic interest payments and principal repayments
C) A bond that can be converted into equity
D) A bond with a floating interest rate
Answer: A) A bond with a single payment of principal and interest at maturity
What is meant by “debt securities”?
A) Financial instruments representing ownership in a company
B) Financial instruments that signify a loan made by an investor to a borrower
C) Stocks issued by a corporation
D) Government grants and subsidies
Answer: B) Financial instruments that signify a loan made by an investor to a borrower
Which of the following is a primary factor affecting bond prices?
A) Changes in interest rates
B) Changes in stock prices
C) Economic growth rates
D) Government policies on trade
Answer: A) Changes in interest rates
What does “call risk” refer to in the context of bonds?
A) The risk that the issuer will call (redeem) the bond before maturity
B) The risk of a bond being sold at a discount
C) The risk of bond prices falling below face value
D) The risk of default by the bond issuer
Answer: A) The risk that the issuer will call (redeem) the bond before maturity
What is the “price to earnings ratio” (P/E ratio) used for?
A) Evaluating bonds
B) Evaluating stocks
C) Determining interest rates on bonds
D) Measuring the bond’s credit rating
Answer: B) Evaluating stocks
Which bond feature typically offers the lowest yield?
A) Callable bonds
B) Convertible bonds
C) Government bonds
D) High-yield bonds
Answer: C) Government bonds