Question 1

What is the par value (face value) of a standard corporate bond?

Accepted Answer

$1,000. This is the amount the issuer promises to repay the bondholder at maturity.

Question 2

What is the coupon rate of a bond?

Accepted Answer

The fixed annual interest rate stated on the bond, expressed as a percentage of par value. It determines the periodic interest payments made to the bondholder.

Question 3

What is the inverse relationship between bond prices and interest rates?

Accepted Answer

When interest rates rise, existing bond prices fall; when interest rates fall, existing bond prices rise. This occurs because new bonds offer more competitive yields, making existing bonds more or less attractive.

Question 4

What does it mean when a bond is trading at a 'discount'?

Accepted Answer

A bond trades at a discount when its market price is below its par value ($1,000). This typically occurs when prevailing interest rates are higher than the bond's coupon rate.

Question 5

What does it mean when a bond is trading at a 'premium'?

Accepted Answer

A bond trades at a premium when its market price is above its par value ($1,000). This occurs when the bond's coupon rate is higher than prevailing market interest rates.

SIE Exam: Debt Instruments

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