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Bonds 102: Bond Duration

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1.
Shorter bond maturities mean longer bond durations.
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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.
2.
Investment risk is the threat that _______.
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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.
Which of the following best describes interest rate risk?
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Rising interest rates will make bonds less valuable. The higher that interest rates go, the less attractive fixed-rate bonds will be on the secondary market.
4.
A bond is issued with a stated value, known as its par value.
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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.
5.
The higher a bond's yield, the faster the bondholder should recover its cost.
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True. Just as with coupon rates, the higher a bond's yield, the faster will be the recovery of its cost.