Question 1

What is the relationship between a bond's price and its yield?

Accepted Answer

Bond prices and yields move in opposite (inverse) directions. When interest rates rise, existing bond prices fall; when rates fall, prices rise.

Question 2

What is the par value (face value) of a standard corporate bond, and what does it represent?

Accepted Answer

The standard par value is $1,000. It represents the principal amount the issuer promises to repay to the bondholder at maturity.

Question 3

What is a bond's coupon rate, and how is the annual interest payment calculated?

Accepted Answer

The coupon rate is the stated annual interest rate on the bond. The annual interest payment equals the coupon rate multiplied by the par value (e.g., 6% × $1,000 = $60/year).

Question 4

When a bond is trading at a premium, what is the relationship among its coupon rate, current yield, and yield to maturity?

Accepted Answer

When a bond trades at a premium, coupon rate > current yield > yield to maturity. The investor pays more than par, so the effective yield is lower than the stated coupon.

Question 5

When a bond is trading at a discount, what is the relationship among its coupon rate, current yield, and yield to maturity?

Accepted Answer

When a bond trades at a discount, coupon rate < current yield < yield to maturity. The investor pays less than par, so the effective yield is higher than the stated coupon.

Series 7: Debt Securities

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