Introduction to Bonds

Show your work for each problem.

1.
What do you receive regularly when you own a bond?
1. a)Shares of stock
2. b)Tax refunds
3. c)Interest (coupon) payments
4. d)Dividends
Answer: Interest (coupon) payments
Bond owners receive interest payments, also called coupon payments, regularly from the bond issuer. Dividends are paid to stockholders, not bondholders.
2.
A bond has a face value of 1000 dollars and a coupon rate of 5%. What is the annual interest payment?
Answer: 50
Annual Interest = Face Value Coupon Rate = dollars per year.
3.
What is the face value of a bond?
1. a)The market price of the bond
2. b)The interest rate paid annually
3. c)The total interest earned
4. d)The amount returned at maturity
Answer: The amount returned at maturity
The face value (also called par value) is the amount the bondholder receives when the bond matures. It is typically the original amount invested.
4.
A bond pays 80 dollars in interest each year for 5 years. What is the total interest earned?
Answer: 400
Total Interest = dollars over 5 years.
5.
A bond has a face value of 2000 dollars and a 4% coupon rate. Calculate the annual interest payment.
Answer: 80
1. What is the face value? 2000
2. Convert 4% to a decimal 0.04
3. Calculate: Face Value times Coupon Rate 80
6.
A 10-year bond has a face value of 5000 dollars and a coupon rate of 3%. What is the total interest earned over 10 years?
Answer: 1500
Annual Interest = dollars. Total = dollars.
7.
Which bond pays MORE total interest? Bond A: 1000 dollars at 6% for 5 years. Bond B: 2000 dollars at 2% for 10 years.
1. a)They are equal
2. b)Bond B (400 dollars)
3. c)Cannot be determined
4. d)Bond A (300 dollars)
Answer: Bond B (400 dollars)
Bond A: dollars. Bond B: dollars. Bond B pays more.
8.
You buy a 7-year bond with face value 3000 dollars at 5% interest. Calculate the total amount you will receive at the end (interest + face value).
Answer: 4050
1. Calculate the annual interest 150
2. Calculate total interest over 7 years 1050
3. Add the face value to total interest 4050
9.
A bond pays 120 dollars per year in interest and has a face value of 4000 dollars. What is the coupon rate (as a percentage)?
Answer: 3
Coupon Rate = %.
10.
Your grandmother gives you a savings bond worth 500 dollars with a 6% coupon rate that matures in 8 years. How much will you have received in total at the end?
Answer: 740
1. Calculate annual interest payment 30
2. Calculate total interest over 8 years 240
3. Add face value to get total received 740
11.
Why are government bonds generally considered safer than corporate bonds?
1. a)They pay higher interest
2. b)They mature faster
3. c)Governments are less likely to default
4. d)They are easier to sell
Answer: Governments are less likely to default
Governments can raise taxes or print money to pay debts, so they are much less likely to default than companies. This makes government bonds safer, though they typically pay lower interest rates.
12.
You have 10000 dollars to invest. Bond A offers 4% for 5 years. Bond B offers 3% for 8 years. How much MORE total interest does Bond B pay compared to Bond A?
Answer: 400
Bond A: dollars. Bond B: dollars. Difference: dollars more.
13.
A company issues a 15-year bond with face value 25000 dollars at 4.5% interest. Calculate how much more than the face value you will have received in total at maturity.
Answer: 16875
1. Convert 4.5% to a decimal 0.045
2. Calculate annual interest 1125
3. Calculate total interest over 15 years 16875
14.
Bond X: 5000 dollars at 5% for 6 years. Bond Y: 8000 dollars at 4% for 5 years. Bond Z: 6000 dollars at 6% for 4 years. Which bond earns the MOST total interest?
1. a)They are all equal
2. b)Bond Y (1600 dollars)
3. c)Bond Z (1440 dollars)
4. d)Bond X (1500 dollars)
Answer: Bond Y (1600 dollars)
X: . Y: . Z: . Bond Y earns the most at 1600 dollars.
15.
You invest in two bonds: Bond A (2000 dollars at 5% for 4 years) and Bond B (3000 dollars at 4% for 5 years). What is your combined total return (face values + all interest)?
Answer: 6000
1. Calculate total interest from Bond A 400
2. Calculate total interest from Bond B 600
3. Add both face values and both interest totals 6000