Investment Bonds Answer Key

Name:

Date:

📈 Part 1: Multiple Choice Questions

1. What is an investment bond?

A loan to a company or government

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A loan to a company or government

A share in a company's ownership

A type of savings account

2. What does the coupon rate represent?

The bond's purchase price

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The annual interest rate paid to bondholders

The bond's maturity date

The bond's credit rating

3. Which of these are advantages of government bonds? (Select all that apply)

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Low risk investment

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Regular income payments

High returns guaranteed

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Backed by government

4. What happens when a bond reaches maturity?

The bond becomes worthless

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The principal amount is repaid to the bondholder

The bond automatically renews

Interest payments stop but principal remains invested

💷 Part 2: Calculations

5. Calculate the annual interest payment for a £1,000 bond with a 4% coupon rate.

Answer: £1,000 × 4% = £1,000 × 0.04 = £40 per year

6. If you buy a £500 bond with a 3.5% coupon rate, how much interest will you receive over 5 years?

Working:

Annual interest = £500 × 3.5% = £17.50

Total over 5 years = £17.50 × 5 = £87.50

✏️ Part 3: Short Answer Questions

7. Explain one disadvantage of investing in corporate bonds compared to government bonds.

Sample Answer: Corporate bonds have higher risk because companies can go bankrupt and fail to repay the loan, whereas government bonds are backed by the government making them much safer investments.

8. Why might an investor choose bonds over shares?

Sample Answer: Bonds provide regular, predictable income through interest payments and are generally less risky than shares. They also guarantee repayment of the principal amount at maturity, unlike shares which can lose value.

9. Complete the sentence: When interest rates in the economy rise, the price of existing bonds tends to _______________.

Answer: fall/decrease (because new bonds offer higher returns, making existing bonds less attractive)