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Bond basics: par value, coupon, maturity, and why price and interest rates move in opposite directions
Finish →Question 1 of 40
Which amount does a conventional bond's par value identify?
Reveal answer
Correct answer: Principal scheduled for repayment at maturity
Par is the bond's face amount, or principal, scheduled for repayment at maturity. It is separate from price and interest.
Question 2 of 40
A $1,000-par bond has a 5% fixed coupon and trades for $920. What is its annual coupon interest?
Reveal answer
Correct answer: $50
Annual coupon interest is $1,000 multiplied by 5%, or $50. The $920 market price is not the coupon base.
Question 3 of 40
A $1,000-par bond is quoted at 97.5. What is its quoted dollar price before accrued interest and charges?
Reveal answer
Correct answer: $975
A quote of 97.5 is 97.5% of par. Multiply $1,000 by 0.975 to get $975.
Question 4 of 40
Comparable market interest rates rise after an investor buys a fixed-rate bond. Credit quality and other factors are unchanged. Which result is expected?
Reveal answer
Correct answer: The price falls and the coupon payment stays the same.
Higher comparable rates make the existing fixed payments less attractive. Price falls to adjust the return, while fixed coupon dollars stay unchanged.
Question 5 of 40
What does a conventional bond's maturity date specify?
Reveal answer
Correct answer: The scheduled date for repayment of principal
Maturity identifies the scheduled principal repayment date. It differs from settlement, an early call date, and the timing used for accrued interest.
Question 6 of 40
An existing fixed-rate bond pays 7%. Comparable new bonds now offer 5% at par. With other factors unchanged, why would buyers pay more for the existing bond?
Reveal answer
Correct answer: Its fixed interest payments are more attractive relative to the new alternatives.
The existing 7% fixed coupon becomes more attractive when comparable new bonds offer 5%. Its market price rises without changing coupon or par.
Question 7 of 40
A holder paid $1,080 for a conventional $1,000-par bond. The issuer pays the bond at its scheduled maturity. How much principal does the holder receive?
Reveal answer
Correct answer: $1,000
Scheduled principal repayment is $1,000 par. The $80 purchase premium does not increase or reduce that face amount.
Question 8 of 40
A $1,000-par bond carries an 8% coupon with semiannual interest payments. How much is each scheduled interest payment?
Reveal answer
Correct answer: $40
Annual interest is $1,000 times 8%, or $80. Divide $80 by two semiannual payments to obtain $40 each.
Question 9 of 40
Which description identifies a bond trading at a premium?
Reveal answer
Correct answer: Its price is above its face value.
A premium means market price exceeds par. It describes price relative to face value, not an increase in coupon dollars.
Question 10 of 40
An investor buys a $1,000-par bond at a quote of 104. What dollar premium over par is paid, ignoring accrued interest and charges?
Reveal answer
Correct answer: $40
104% of $1,000 is $1,040. Subtract $1,000 par from $1,040 to obtain a $40 premium.
Question 11 of 40
A bond's scheduled annual interest is $60 on $1,000 par. Its market price moves from $1,000 to $900 after comparable rates rise. Which statement explains the adjustment?
Reveal answer
Correct answer: A buyer pays less for the same $60 annual interest and $1,000 scheduled principal.
The market changes the amount buyers pay for fixed cash flows. The $60 coupon and $1,000 face value remain unchanged.
Question 12 of 40
A $1,000-par bond trades for $980 and has a 4% fixed coupon. Which quotation and annual interest amount correctly describe it?
Reveal answer
Correct answer: Quote 98; annual interest $40
$980 divided by $1,000 is 98%, so the quote is 98. Annual interest is 4% times $1,000, or $40.
Question 13 of 40
Which statement best describes the coupon rate on a conventional fixed-rate bond?
Reveal answer
Correct answer: The stated annual interest rate applied to face value
The coupon rate is the stated annual rate used with par to determine coupon dollars. It is distinct from price-based income measures and market rates.
Question 14 of 40
A holder sees comparable market rates fall while the credit quality of a fixed-rate bond is unchanged. Which price movement is consistent with the interest-rate effect?
Reveal answer
Correct answer: From 101 to 104
Falling comparable rates tend to raise the price of an existing fixed-rate bond. Moving from 101 to 104 is the upward movement.
Question 15 of 40
Two investors buy the same fixed-rate bond issue at different prices. Each holds $1,000 par. What should be identical for their holdings?
Reveal answer
Correct answer: Annual coupon dollars
The same fixed coupon rate applied to the same par gives equal coupon dollars. Different purchase prices change cost-based measures, not coupon cash.
Question 16 of 40
A $1,000-par bond has a 6% annual coupon. Which amount should be multiplied by 6% to calculate annual coupon interest when the quote is 103?
Reveal answer
Correct answer: $1,000
The coupon base is $1,000 par. Multiplying $1,000 by 6% gives $60 annual interest, regardless of the 103 quotation.
Question 17 of 40
What does a bond quotation of 100 indicate?
Reveal answer
Correct answer: A price equal to 100% of face value
Bond prices are quoted as a percentage of par. A quotation of 100 is par pricing: $1,000 for $1,000 face value.
Question 18 of 40
A bond paid $30 every six months before comparable market rates rose. It is a conventional fixed-rate bond. What is the scheduled interest payment every six months after the rate increase?
Reveal answer
Correct answer: $30, because the fixed coupon has not changed
Changes in comparable rates affect market price, not the existing fixed coupon. The semiannual payment remains $30.
Question 19 of 40
Two otherwise comparable $1,000-par bonds have the same maturity. One pays a 4% coupon and the other pays 6%. If both were offered at par, why would buyers prefer the cash flows of the 6% bond?
Reveal answer
Correct answer: It pays more annual interest for the same stated price.
At equal par and equal prices, the 6% coupon supplies more annual interest. Different coupons do not alter the stipulated equal principal or maturity.
Question 20 of 40
A conventional bond is bought at 92 and later repays its $1,000 par at maturity. Ignoring interest and charges, how much more principal is received than the quoted purchase cost?
Reveal answer
Correct answer: $80
The purchase price is 92% times $1,000, or $920. Principal repayment of $1,000 minus $920 cost gives $80.
Question 21 of 40
Which comparison is most appropriate for isolating the effect of market interest rates on an existing fixed-rate bond's price?
Reveal answer
Correct answer: A rate change with credit quality and other factors held constant
Holding other influences constant isolates the inverse price-rate relationship. Simultaneous changes in credit quality or payments complicate attribution.
Question 22 of 40
One $1,000-par bond is quoted at 99. Another $1,000-par bond is quoted at 101. Which classification is correct?
Reveal answer
Correct answer: 99 is a discount; 101 is a premium.
100 is the par quotation. Therefore 99 is below par and 101 is above par, regardless of their identical face amounts.
Question 23 of 40
An investor says, 'My fixed-rate bond's coupon is unchanged, so its market price cannot change when rates move.' Which response best identifies the error?
Reveal answer
Correct answer: The market can change the price paid for the same fixed payments.
Fixed contractual payments do not imply a fixed market value. Buyers change the price they pay as comparable market rates change.
Question 24 of 40
A $1,000-par bond pays $25 every six months. What is its annual coupon rate?
Reveal answer
Correct answer: 5%
Two $25 payments total $50 annually. Divide $50 by $1,000 par to obtain 5%.
Question 25 of 40
In a bond transaction, which description correctly pairs the issuer and the bondholder?
Reveal answer
Correct answer: Issuer: borrower; bondholder: creditor
A bond represents debt. The issuer has borrowed, and the bondholder holds the creditor's claim.
Question 26 of 40
A $1,000-par bond's quote moves from 96 to 99. Ignoring interest and charges, by how many dollars does the price increase?
Reveal answer
Correct answer: $30
The quotation rises 3 percentage points: 99 minus 96. Three percent of $1,000 is $30.
Question 27 of 40
A buyer pays a premium for a conventional bond that will repay par at maturity. Which statement correctly distinguishes the purchase from the issuer's obligation?
Reveal answer
Correct answer: The premium raises the buyer's cost above par but does not raise scheduled principal repayment.
A premium is part of market purchase cost, not an amendment to principal, coupon, or maturity. The issuer's scheduled principal obligation remains par.
Question 28 of 40
A $1,000-par fixed-rate bond has a 3% coupon. Comparable new bonds are offered at par with 5% coupons. With other factors equal, where should the existing bond trade to compete?
Reveal answer
Correct answer: Below par, because its fixed interest payments are lower
The old 3% fixed payments are less attractive than comparable 5% payments offered at par. A discount allows the existing bond to compete without changing its coupon.
Question 29 of 40
Which term describes the amount a buyer and seller agree on for a bond today, as distinct from its scheduled principal repayment?
Reveal answer
Correct answer: Market price
Market price is the current trading amount. Par and face amount identify principal, while annual coupon identifies interest.
Question 30 of 40
A $1,000-par bond is quoted at 106.5. What is the quoted dollar price, before accrued interest and charges?
Reveal answer
Correct answer: $1,065
106.5% times $1,000 equals $1,065. A quote above 100 produces a premium price.
Question 31 of 40
A fixed-rate bond was trading at par. Comparable market rates then decline. An analyst predicts a price above par with unchanged coupon dollars. Which reasoning supports the prediction?
Reveal answer
Correct answer: The existing fixed payments become more attractive compared with newly available payments.
A decline in comparable rates makes the existing fixed payments more valuable, supporting a premium price. The issuer need not change the bond's terms.
Question 32 of 40
A $1,000-par bond was purchased at 90. Comparable market rates later decline, and its quote rises to 95. Which description of the new quoted price is correct?
Reveal answer
Correct answer: $950, still a discount because it remains below par
95% of $1,000 is $950. The price has risen but remains below $1,000 par, so the bond still trades at a discount.
Question 33 of 40
In the conventional percentage quotation for a $1,000-par bond, what does one full price point represent?
Reveal answer
Correct answer: $10
One full quotation point is 1% of par. One percent times $1,000 is $10.
Question 34 of 40
A conventional $1,000-par bond pays $70 of annual interest. Its quoted price falls to 95. What is its stated annual coupon rate after the price decline?
Reveal answer
Correct answer: 7%
The coupon rate is $70 divided by $1,000 par, or 7%. A market-price decline does not change that rate.
Question 35 of 40
An investor paid $900 for a conventional $1,000-par bond with a 6% fixed coupon. A note says, 'Annual interest is $54 and principal at maturity is $900.' Which correction is needed?
Reveal answer
Correct answer: Change annual interest to $60; change principal to $1,000.
Annual coupon interest is 6% times $1,000 par, or $60. Scheduled principal repayment is the $1,000 face amount, not the $900 purchase price.
Question 36 of 40
Which description best distinguishes a bond's maturity date from an early call date?
Reveal answer
Correct answer: Maturity is scheduled principal repayment; an early call date permits issuer redemption before then.
Maturity is the scheduled date for principal repayment. A call feature permits the issuer to redeem before maturity under the bond's terms.
Question 37 of 40
A holder has two $1,000-par bonds from the same 4% fixed-coupon issue. What is the combined annual coupon interest?
Reveal answer
Correct answer: $80
Two bonds have $2,000 total par. Multiply $2,000 by 4% to get $80 combined annual interest.
Question 38 of 40
A fixed-rate bond's quote declines after comparable market rates rise. Another analyst attributes the decline to a lower coupon payment. Which observation would identify the analyst's mistake?
Reveal answer
Correct answer: The scheduled interest dollars are unchanged even though the trading price is lower.
The fixed coupon does not decline with market price. Higher competing rates can lower the value of unchanged contractual payments.
Question 39 of 40
An investor buys a conventional $1,000-par bond at a quote of 107. The issuer repays par at maturity. Ignoring interest and charges, what is the difference between principal repayment and purchase cost?
Reveal answer
Correct answer: A $70 loss
107% of $1,000 is a $1,070 cost. Subtracting $1,070 from $1,000 repaid gives a $70 principal loss, excluding coupons and charges.
Question 40 of 40
An existing 5% fixed-rate bond traded at par. Comparable market rates rise to 6%, with other factors unchanged. Which statement is best supported?
Reveal answer
Correct answer: Its price should fall, but the exact new price cannot be determined from those rates alone.
The inverse relationship establishes a downward price direction. It does not establish a one-for-one number of price points for each percentage-point rate change.
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