Bonds have two primary roles: income — whether taxable or tax-free — and portfolio diversification. Much of the time, when stocks or other investments struggle, bonds hold their value. But these are complex creatures, and there’s a lot more to know than the current interest rate on a Treasury bond or the name of a big bond fund.
Take our quiz to test your bond savvy — and hopefully to learn a thing or two along the way.
1. When interest rates rise…
A. Bond prices go up, too, because bond prices are directly linked to interest rates.
B. Bond prices fall.
2. What is the meaning of “duration” in bond investing?
A. It's a rough estimate of how long it will take to reach your investing goal.
B. It's the number of years a bond issuer has gone without a negative credit event.
C. It's a measure of a bond's interest rate sensitivity.
3. Which is generally the biggest risk to making a solid return in bonds?
A. A rising stock market that attracts investment assets at the expense of bonds.
B. Rising inflation.
C. Talk of a possible recession.
D. Growing government budget deficits.
4. What is an inverted yield curve?
A. It means the interest rates on a bond you buy now will decline, or "invert," according to a fixed time schedule.
B. It is when Treasury securities pay higher interest rates than corporate bonds or mortgages with the same maturity.
C. It's a general description of a wild and volatile bond market and is also known as an upside-down bond market.
D. It's when short-term Treasury notes pay a higher interest rate than long-term government notes and bonds.
5. Which of the following bond issuers is NOT rated both AAA by Standard & Poor’s and Aaa by Moody’s? (Those are the highest possible credit ratings.)
B. Johnson & Johnson
D. The United States of America
6. What is a bond's yield to maturity?
A. The interest rate on the bond when it is issued.
B. The total return, including a gain or loss in the bond's price, that you can expect if you buy the bond today and keep it until it matures.
C. The interest rate the bond pays between now and the date it is scheduled to mature.
7. If a company goes out of business and liquidates, who has the first claim on whatever cash becomes available in the bankruptcy?
A. The bondholders.
B. The chief executive offer and other executives who owned a majority of the now-worthless common stock.
C. Bankers with delinquent loans to the business.
D. The gas and electric company and the company's other suppliers.
8. When you buy bonds from your broker, you must order in multiples of $1,000.
9. Low-rated, high-yield bonds, also known as junk bonds, tend to do well when…
A. Inflation is high.
B. Investors flock to low-quality, risky assets, such as penny stocks or dicey initial public offerings.
C. The economy is so strong that even weak companies are profitable and paying their debts.
10. Municipal bonds are often known as tax-exempt bonds, so you always escape income tax on the interest.