Test your knowledge

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Low bond liquidity can lead to lower transaction costs.

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True

False

False. Low bond liquidity leads to higher trading costs.

The process of investing in many different types of bonds is called diversification.

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True

False

True. Diversification involves choosing securities that involve a wide variety of different aspects, such as risk levels and types of issuers.

In general, when interest rates _______, bond prices _______.

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Go down/decrease

Go down/increase

Go up/increase

Go down/increase. Bondholders can increase the prices of their bonds when interest rates fall, because their bonds will still have higher rates and will therefore be in demand.

Credit analysis includes researching a company's entire industry.

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True

False

True. Looking at other companies in the same industry is part of credit analysis.

Bonds with the highest grade are rated _______.

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AAA

BBB

AAA. Bonds least likely to default are graded "AAA."

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