13 Lecture - Bonds and classification of bonds

  1. Home
  2. Courses
  3. Financial Management
  4. 13 Lecture

13 Lecture

MGT201

Midterm & Final Term Short Notes

Bonds and classification of bonds

Bonds are financial instruments used by companies, governments, and other entities to borrow money from investors. They have a fixed interest rate and a maturity date when the principal is repaid. Bonds are classified based on the issuer, intere


Important Mcq's
Midterm & Finalterm Prepration
Past papers included

Download PDF

  1. Which of the following is a type of bond that pays no interest but is sold at a discount to its face value? a) Corporate bond b) Government bond c) Municipal bond d) Zero-coupon bond Answer: d) Zero-coupon bond

  2. What type of bond can be converted into shares of the issuer's common stock? a) Corporate bond b) Government bond c) Municipal bond d) Convertible bond Answer: d) Convertible bond

  3. Which type of bond is issued by state and local governments? a) Corporate bond b) Government bond c) Municipal bond d) Convertible bond Answer: c) Municipal bond

  4. Which type of bond has a variable interest rate that is tied to an external benchmark? a) Fixed-rate bond b) Floating-rate bond c) Zero-coupon bond d) Convertible bond Answer: b) Floating-rate bond

  5. What type of bond is backed by the issuer's ability to generate sufficient cash flow to make interest and principal payments? a) Secured bond b) Unsecured bond c) Junk bond d) Callable bond Answer: b) Unsecured bond

  6. What type of bond is issued by companies with lower credit ratings and carries a higher risk of default? a) Investment-grade bond b) Junk bond c) Municipal bond d) Convertible bond Answer: b) Junk bond

  7. Which type of bond can be redeemed by the issuer prior to its maturity date? a) Callable bond b) Puttable bond c) Zero-coupon bond d) Convertible bond Answer: a) Callable bond

  8. What type of bond pays a fixed interest rate over its lifetime? a) Variable-rate bond b) Floating-rate bond c) Zero-coupon bond d) Fixed-rate bond Answer: d) Fixed-rate bond

  9. Which type of bond is secured by specific assets of the issuer? a) Unsecured bond b) Secured bond c) Junk bond d) Convertible bond Answer: b) Secured bond

  10. What type of bond can be sold back to the issuer at a specified price before its maturity date? a) Callable bond b) Puttable bond c) Zero-coupon bond d) Convertible bond Answer: b) Puttable bond



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

Download PDF

  1. What is a bond? Explain its basic features. Ans: A bond is a type of debt security that allows the issuer to raise capital by borrowing funds from investors. The basic features of a bond include the face value, coupon rate, maturity date, and issuer.

  2. What is the difference between a coupon rate and a yield? Ans: The coupon rate is the fixed rate of interest paid on a bond, while the yield is the overall return on the bond, taking into account the purchase price and the coupon payments.

  3. What is a callable bond? Ans: A callable bond is a bond that can be redeemed by the issuer before its maturity date. This option is typically included in the bond's terms and conditions, and the issuer can choose to exercise it if interest rates decline.

  4. What is a convertible bond? Ans: A convertible bond is a type of bond that can be converted into a specified number of shares of the issuer's stock. This feature provides investors with the opportunity to benefit from potential stock price increases, while also providing the security of a fixed-income investment.

  5. What is a zero-coupon bond? Ans: A zero-coupon bond is a type of bond that does not pay regular interest payments. Instead, it is sold at a discount to its face value and redeemed for the face value at maturity, providing investors with a capital gain.

  6. What is the difference between a secured and an unsecured bond? Ans: A secured bond is backed by specific assets of the issuer, while an unsecured bond is not. This means that in the event of default, holders of secured bonds have a higher claim on the issuer's assets.

  7. What is a junk bond? Ans: A junk bond is a type of bond that is rated below investment grade, indicating a higher risk of default. These bonds typically offer higher yields to compensate investors for this risk.

  8. What is the difference between a government bond and a corporate bond? Ans: A government bond is issued by a government entity, while a corporate bond is issued by a company. Government bonds are generally considered to be lower risk, while corporate bonds offer higher yields.

  9. What is a municipal bond? Ans: A municipal bond is a type of bond issued by a state or local government entity to fund public projects, such as schools or roads. These bonds are typically exempt from federal income tax and may also be exempt from state and local taxes.

  10. What is a bond rating? How is it determined? Ans: A bond rating is an assessment of the creditworthiness of a bond issuer, indicating the risk of default. Bond ratings are typically assigned by rating agencies, such as Standard & Poor's or Moody's, and are based on a variety of factors, including the issuer's financial health, industry trends, and economic conditions.

Bonds are debt securities issued by corporations, municipalities, and government entities to raise capital. They are a popular investment option for individuals and institutions due to their predictable income stream and relative safety compared to stocks. Bonds are generally classified based on the issuer, the interest payment frequency, and the maturity date. The main types of bonds include government bonds, corporate bonds, municipal bonds, and international bonds. Government bonds are issued by government entities such as the U.S. Treasury and are considered to be the safest type of bond. Corporate bonds are issued by companies and are generally considered to be riskier than government bonds due to the potential for default. Municipal bonds are issued by state and local governments and are generally tax-exempt, making them attractive to investors in high tax brackets. International bonds are issued by foreign governments and corporations, and they carry additional currency risk due to fluctuations in exchange rates. Bonds can also be classified based on the frequency of interest payments. Most bonds pay interest semi-annually, but some may pay interest monthly, quarterly, or annually. Another important factor to consider when investing in bonds is the maturity date. The maturity date is the date when the principal amount of the bond is due to be repaid. Short-term bonds typically mature in less than three years, while long-term bonds may have a maturity date of 20 or 30 years. Overall, understanding the different types of bonds and their classifications is essential for making informed investment decisions. Investors should consider their investment goals, risk tolerance, and other factors when selecting bonds to add to their portfolios.

Course Lectures