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1.
A bond is issued with a stated value, known as its par value.
True. A bond's stated value is its par, or face value. This is the value at which the bond will be bought back by the issuer upon its maturity.
2.
Investment risk is the threat that _______.
If interest rates fall, the interest payments and principal the investor receives will have to be reinvested at lower rates. This is a common fear among bond investors.
3.
Roughly speaking, the price of a bond will change according to its duration.
True. The price of a bond will change due to interest rates, roughly according to its duration. In other words, if rates move up by one percentage point--for example, from 6 percent to 7 percent--the price of a bond with a duration of 10 (years) will move down by about 10 percent.
4.
Which of the following best describes a bond's par value?
It remains fixed for the life of the bond. While a bond's current value can and usually does fluctuate during the life of the bond, its par value remains fixed.
5.
Shorter bond maturities mean longer bond durations.
False. Longer, not shorter, bond maturities mean longer durations. Imagine a fixed amount of money--for example, $1,000--being mailed to you in small payments over time. If these payments were spread over a one-year period, you would recover your money faster than if the same dollar amount were spread over a five-year period.
