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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.
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.
3.
Duration is used to predict how much bond prices will change due to fluctuating interest rates.
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True. Duration takes into account the weighted average of a bond's coupon rates, its principal, and the time until the rates are paid.
4.
The amount of fixed interest a bond pays each year until it matures is called its _______.
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Coupon rate. Premiums and discounts are not interest rates.
5.
When interest rates fall, assuming an equal amount for all bond maturities, bonds with short maturities will have _______.
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Smaller premiums than bonds with longer maturities. Short maturities mean small discounts.