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Bonds 101: Bond Market Interest Rates

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1.
The lower a bond's credit risk, the higher its yield.
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False. The lower a bond's credit risk, the lower its yield. Low-risk bonds generally pay less interest than those that carry higher risk.
2.
Changing interest rates affect bonds with different maturities to the same degree.
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False. Changing interest rates affect bonds with varying maturities differently.
3.
If investors expect interest rates to rise for an extended period, the bond market is bullish.
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False. If investors expect interest rates to rise for an extended period, the bond market is bearish because bond prices will fall, indicating a disinterest in bonds.
4.
If interest rates rise 2 percent and a bond's duration is 10 years, you can expect _______.
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The bond's price to fall 20 percent. If interest rates rise 2 percent and a bond's duration is 10 years, you can expect the bond's price to fall 20 percent.
5.
When interest rates fall, bond prices _______.
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Rise. Because rates on existing bonds may be higher than bonds issued with the lowered rates, owners of existing bonds can sell theirs for a profit.