3.4.2 What is a Bond Assignment Notes What are the Main Types of Bonds? As you learned in the previous video, you can buy a corporate bond or a government bond. There are different types of bonds within these two categories as well! Read through theinfographicon this page to learn about the different bond types. Then answer the questions. 1. The higher the risk associated with the bond, the _____(more/less) likely a corporation might default on paying the investor. Interest rates for riskier bonds tend to be ______ (higher/lower) so that investors are ______ (more/less) willing to take on that risk. Bonus:A riskier bond usually comes from a corporation that has a _____ (low/high) credit rating. 2. Which tends to be a riskier investment - corporate bonds or government bonds? Why? Corporate bonds tend to be a riskier investment because they are not supplied by large stable national entities like government bonds are. 3. Which type of bond would you be comfortable investing in? Explain. I would be more comfortable investing in government bonds because they are safer. I would rather save myself the worry despite being paid less interest. Back to Basics: Understanding Yield and the Effects of Rising Rates If you buy a bond and hold it through its maturity dates, the ups and downs of the bond market will not impact your investment. However, if you decide to sell a bond before its maturity date, you need to understand how the current market's interest rates impact the price of your bond. Read through his infographicand watch thevideoto learn more about this relationship. Then answer the questions. 1. When overall interest rates rise (to 10%), the bond you already own (with 5% coupon rate) becomeslessvaluable to potential buyers, so its price willfall. 2. When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes morevaluable to potential buyers, so its price willrise. 3. Generally, the longer the term of the bond, the (lower/higher) the chance the bond price may change due to changes in yield. 4. Explain why someone who is not interested in selling their bond before its maturity date does not have to worry about the current bond market and its impact on the price of the bond. When you wait for a bond to reach its maturity date, then the impact of the bond market will not affect your investment.
