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Question 1. What does the par value of a bond represent? A) The amount paid in interest annually B) The amount the issuer owes the bondholder at maturity C) The market price at issuance D) The bond’s accrued interest Answer: B Explanation: Par value is the face value or principal amount repaid at maturity. Question 2. Which type of bond is issued by the federal government and considered free of default risk? A) Corporate bond B) Treasury bond C) Municipal bond D) Junk bond Answer: B Explanation: Treasury bonds are issued by the U.S. government and are considered default risk-free. Question 3. What is the coupon rate of a bond? A) The market interest rate B) The bond’s yield to maturity C) The fixed annual interest payment as a percentage of par value D) The bond’s price premium Answer: C Explanation: The coupon rate is the annual interest paid, expressed as a percentage of the bond’s par value.
Question 4. Which bond is backed by the general taxing power of a municipality? A) Revenue bond B) General obligation bond C) Corporate bond D) Treasury bill Answer: B Explanation: General obligation bonds are supported by the full faith and credit of the issuing municipality. Question 5. What is a distinguishing feature of revenue bonds? A) Backed by government taxing power B) Repaid from specific project revenues C) Issued only by corporations D) Have no maturity date Answer: B Explanation: Revenue bonds are repaid from the income generated by specific projects. Question 6. What does the indenture of a bond specify? A) The bond’s issue price B) The legal contract outlining bond terms and covenants C) The day-to-day trading volume D) The yield to maturity Answer: B Explanation: The indenture is the legal agreement between issuer and bondholder.
A) Can be converted into stock of the issuing company B) Convertible into another bond C) Can be sold to another investor D) Only issued by governments Answer: A Explanation: Convertible bonds can be exchanged for a set number of shares of the issuer. Question 11. Which bond provision reduces default risk by requiring periodic repayments of principal? A) Call provision B) Sinking fund provision C) Put provision D) Conversion provision Answer: B Explanation: Sinking funds require issuers to retire a portion of the debt regularly. Question 12. Which entity assigns credit ratings to bonds? A) SEC B) Rating agencies (S&P, Moody's, Fitch) C) Federal Reserve D) Bondholders themselves Answer: B Explanation: Rating agencies assess the credit risk of bond issuers. Question 13. What is the most significant risk for a bondholder if interest rates rise? A) Credit risk
B) Interest rate risk C) Inflation risk D) Liquidity risk Answer: B Explanation: When rates rise, existing bond prices fall, exposing holders to interest rate risk. Question 14. What is a “dirty price” in bond trading? A) Price including accrued interest B) Price excluding accrued interest C) Price before issuance D) Price after default Answer: A Explanation: Dirty price includes the bond’s accrued interest since the last coupon. Question 15. What does “yield to maturity” (YTM) represent? A) Coupon divided by price B) Total return if held to maturity C) Current yield D) Price appreciation only Answer: B Explanation: YTM is the total expected return if the bond is held to maturity. Question 16. What is the present value (PV) of a bond? A) The face value B) The sum of all future cash flows discounted at the required rate
D) Yield to call Answer: B Explanation: Current yield measures income as a percentage of market price. Question 20. Which type of risk affects the ability to sell a bond quickly at a fair price? A) Credit risk B) Liquidity risk C) Interest rate risk D) Reinvestment risk Answer: B Explanation: Liquidity risk is the challenge of finding buyers without price concessions. Question 21. What is the main risk faced by holders of zero-coupon bonds? A) No price appreciation B) No coupon reinvestment risk C) Phantom income tax on accrued interest D) High liquidity Answer: C Explanation: Holders may owe taxes on imputed interest even though they receive no cash until maturity. Question 22. Which bonds have coupons that adjust periodically based on a reference rate? A) Zero-coupon bonds B) Floating-rate notes C) TIPS
D) Callable bonds Answer: B Explanation: Floating-rate notes reset their coupons based on benchmarks. Question 23. What is a key feature of Treasury Inflation-Protected Securities (TIPS)? A) Fixed principal B) Principal adjusts with inflation C) No coupon payments D) Callable at any time Answer: B Explanation: TIPS principal increases with inflation, protecting purchasing power. Question 24. Which of the following best describes asset-backed securities (ABS)? A) Backed by government taxing authority B) Secured by pools of financial assets C) Only issued by corporations D) Not traded in secondary markets Answer: B Explanation: ABS are backed by pools of loans or receivables. Question 25. What happens to a bond’s price if market interest rates fall? A) Price falls B) Price rises C) Price stays the same D) Price becomes negative
Explanation: Negative covenants restrict issuer behaviors to protect bondholders. Question 29. What is an affirmative covenant? A) Restricts issuer actions B) Obliges issuer to take certain actions C) Allows bondholder to convert D) Specifies coupon rate Answer: B Explanation: Affirmative covenants require the issuer to do specific things (e.g., maintain insurance). Question 30. What does “call protection” refer to? A) Period when bond cannot be called B) Guarantee of fixed coupon C) Inflation protection D) Fixed maturity date Answer: A Explanation: Call protection is a time during which the issuer cannot redeem the bond early. Question 31. Reinvestment risk is the risk that: A) Coupons cannot be reinvested at the same rate B) Issuer will default C) Bond cannot be sold D) Coupons will not be paid Answer: A Explanation: Falling rates may force reinvestment of coupons at lower rates.
Question 32. What does the term “premium bond” indicate? A) Trades below par B) Trades above par C) Has no coupon D) Can be converted Answer: B Explanation: Premium bonds trade above their par value. Question 33. What is the main disadvantage for an issuer in calling a bond? A) Increases debt B) Results in call premium payment C) Increases coupon payments D) Reduces credit rating Answer: B Explanation: Issuers often pay bondholders a premium to call bonds early. Question 34. What does a “step-up” bond feature? A) Decreasing coupon rate B) Increasing coupon rate at set intervals C) Convertible feature D) Callable at any time Answer: B Explanation: Step-up bonds have coupons that increase at predetermined times.
A) Coupon rate B) Collateral backing C) Maturity D) Legal jurisdiction Answer: B Explanation: Secured bonds are backed by collateral, unsecured are not. Question 39. Which bond feature allows conversion into shares at a set price? A) Call provision B) Put provision C) Convertible feature D) Sinking fund Answer: C Explanation: Convertible bonds specify a conversion price for exchanging bonds into stock. Question 40. What is the “conversion ratio” in a convertible bond? A) Amount of coupon paid B) Number of shares per bond C) Time to maturity D) Price premium Answer: B Explanation: The conversion ratio states how many shares a bondholder can receive per bond. Question 41. Which bond provision helps reduce default risk before maturity? A) Convertible feature
B) Sinking fund provision C) Call provision D) Put provision Answer: B Explanation: Sinking funds require the issuer to retire debt gradually, lowering default risk. Question 42. What is “phantom income” related to zero-coupon bonds? A) Unrealized capital gains B) Taxable accrued interest not yet received C) Tax on bond sale D) Income from bond conversion Answer: B Explanation: Investors must pay tax on accrued interest each year, though they receive no cash. Question 43. What is a “bullet” maturity bond? A) Principal repaid over time B) Entire principal repaid at maturity C) Callable at any time D) Has no coupon Answer: B Explanation: Bullet maturity means the whole principal is paid at maturity. Question 44. What happens if a bond is trading at a discount? A) Price is above par B) Coupon is above market rates
D) Conversion risk Answer: B Explanation: Long-term bonds are more sensitive to rate changes. Question 48. Which bond typically offers the lowest yield? A) Treasury bond B) Investment-grade corporate bond C) High-yield corporate bond D) Revenue bond Answer: A Explanation: Treasury bonds are considered safest and thus offer the lowest yields. Question 49. What does a bond’s “yield spread” compare? A) Coupon to par B) Yield to another benchmark C) Price to coupon D) Accrued interest Answer: B Explanation: Yield spread is the difference between yields of different bonds, indicating risk. Question 50. What does “callable at par” mean? A) Bondholder can demand par at any time B) Issuer can call at par value C) Bond is always traded at par D) Coupon is paid at par
Answer: B Explanation: Issuer can redeem the bond at its face value. Question 51. What is a “perpetual bond”? A) No maturity date B) Redeemed early C) Convertible to stock D) Only pays one coupon Answer: A Explanation: Perpetual bonds pay coupons indefinitely and have no maturity date. Question 52. What is the main tax implication for corporate bonds? A) Federal tax-exempt B) Interest is taxable as ordinary income C) Taxed as capital gains D) Taxed only at maturity Answer: B Explanation: Corporate bond interest is taxed as ordinary income. Question 53. What is “default risk”? A) Risk of coupon payment delay B) Risk issuer cannot meet debt obligations C) Risk of price volatility D) Risk of early redemption Answer: B
Question 57. What is a “putable” bond? A) Callable by issuer B) Convertible to equity C) Can be sold back to issuer at specific times D) Only issued by governments Answer: C Explanation: Putable bonds allow holders to sell back at predetermined dates. Question 58. What is the “clean price” of a bond? A) Price including accrued interest B) Price excluding accrued interest C) Price after default D) Price before issuance Answer: B Explanation: Clean price does not include accrued interest. Question 59. Which bond structure pays no periodic interest? A) Floating-rate note B) Zero-coupon bond C) Callable bond D) TIPS Answer: B Explanation: Zero-coupon bonds pay all interest at maturity.
Question 60. What is the main reason investors buy high-yield (junk) bonds? A) Tax-exempt interest B) Higher income potential C) Lower risk D) Guaranteed payment Answer: B Explanation: Junk bonds offer higher yields to compensate for higher risk. Question 61. If a bond’s yield to maturity is below its coupon rate, the bond is trading at: A) Discount B) Par C) Premium D) Zero-coupon Answer: C Explanation: Premium bonds have a coupon higher than the YTM. Question 62. What is the principal risk of reinvesting bond coupons in a falling rate environment? A) Credit risk B) Reinvestment risk C) Call risk D) Inflation risk Answer: B Explanation: Reinvestment risk is the inability to reinvest at the same yield. Question 63. Which entity guarantees municipal revenue bonds?
