Question

Which of the following is true of bonds?

	a	Since bonds have a face value of $1,000, they can be purchased at any time for $1,000.
	b	Once purchased, bonds cannot be sold and must be held until maturity.
	c	Investors in bonds are part owners of the corporation that issued the bonds.
	d	For the corporation that issues bonds, bonds are a way to fund its assets.

Answer 1

Only option d is True i.e., For the corporation that issues bonds, bonds are a way to fund its assets is True.

The explanations of all the four options are described below:

a. Since bonds have a face value of $1,000, they can be purchased at any time for $1,000 - False

Explanation - Time value of money applies to bond valuation and depending on the time when the bond is bought after its issue date will determine the price of the bonds.

b. Once purchased, bonds cannot be sold and must be held until maturity - False

Explanation - Some bonds can be sold before their maturity also. One example of such type of bond is a callable bond. Callable bonds can be redeemed before it reaches its maturity.

c. Investors in bonds are part owners of the corporation that issued the bonds - False

Explanation - Generally bonds are debt instruments and the bond issuer pays the investors periodic coupon payments and unlike stocks, bondholders are not part owners of the corporation that issued the bonds. The exception is convertible bonds as when a convertible bond is converted to its respective stock, the investor is no more entitled to coupon payments, and becomes part owner of the corporation that issued the bonds.

d. For the corporation that issues bonds, bonds are a way to fund its assets - True

Explanation - Bonds are debt instruments and corporations issue bonds to fund its assets. With the issuance of bonds, corporations borrow money from investors with a promise of periodic coupon (interest) payments till bond's maturity and the payment of the face value of the bond upon its maturity.