The Ultimate Junk Bonds Quiz

Staff

4 Min Quiz

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About This Quiz

Junk bonds are a controversial subject for some. For others, they may be the make-or-break purchase in their financial decisions. Find out where you stand taking this quiz.

Generally speaking, what's the difference between stocks and bonds?

Stocks represent a share or partial ownership of a company, whereas bonds are a loan to the company.

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When you purchase bonds, you agree to lend money to the:

When you acquire bonds, it means that you have agreed to lend money to the bond issuer.

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What is meant by the "date of maturity"?

The date of maturity refers to the last date by which the loan will be paid back following the payment of interest at various intervals until then.

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Why are bonds called fixed-income securities?

Bonds are fixed-income securities simply because of the regular interest payments made at fixed amounts.

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How do junk bonds differ from regular bonds?

Junk bonds are usually issued by companies that have low credit ratings.

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Junk bonds usually entail high rates of returns or high yields. Why do junk-bond companies offer this?

Junk-bond companies seek higher credit ratings and their offering of high yields raises it while giving them handsome loans.

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Why was Michael Milken named the Junk Bond King?

Milken simply cashed in on a concept whereby junk bonds would earn riches quickly at what he thought was worthwhile risk.

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How did Michael Milken intend to fund the takeovers of hostile companies?

Milken's idea was to borrow huge loans that promised high yields, generate instant profit from the newly acquired companies and thus repay the loans.

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How was tax law a willing partner to the junk-bond schemes of Milken?

Milken knew that interest payments on debt were tax deductible and he used this fact for his schemes.

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When did the junk bond craze reach its anti-climax?

The junk bond craze peaked and rapidly dropped at the end of the 1980s.

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Michael Milken was sentenced to 10 years in jail. What was he found guilty of?

Milken was found guilty of securities fraud.

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How do you figure out if the bonds you've purchased are junk bonds?

You should always look at the ratings. These are provided by ratings agencies.

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Which of these pairs are well known ratings agencies?

Moody's Investors Service and Standard and Poor's are a pair of well known ratings agencies. Another agency is Fitch Ratings Inc.

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Ratings agencies give ratings for both "grade" and:

The ratings are for "grade" -- investment or junk -- and "risk" -- low to high.

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How do they determine the willingness of a company to pay its debts?

They look at the company's financial plans and get a fairly accurate idea of its willingness to pay.

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Which body oversees the securities market?

The U.S. Securities and Exchange Commission (SEC) oversees the entire securities market and, therefore, sometimes investigates junk bonds.

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What is the recommended percentage of junk bonds within a diversified portfolio?

It's about 5 to 10 percent of your diversified portfolio. This is called a safe percentage for junk bonds.

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Should you buy junk bonds only during economic boom or only during a recession?

Some analysts recommend buying junk bonds only during times of economic boom. Others say during a recession is also okay if there is an expected economic rebound.

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If a company takes risks, what sort of rating might it get?

It might be taking risks but it might, therefore, get a lower rating. Paradoxically, not taking risk seems to indicate not being aggressive enough in the market.

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A bond that has a short maturity date has less chance of:

A bond with a short maturity date seems a relatively small risk, since there's less chance of default.

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