Question

All of the following statements related to bonds are correct except bonds?

1) arise from a contract known as a bond debenture
2) represent a promise to pay a sum of money plus periodic interest
3) usually pay interest annually
4) typically have a $1,000 face value

Answer 1

The incorrect statement about bonds is that they usually pay interest annually. In reality, bonds often pay interest semi-annually. Other details about bonds, such as their part in corporate financing and their features, were discussed to provide context to the correct answer.

Step-by-step explanation:

The statement related to bonds that is not correct is that bonds usually pay interest annually. In fact, the majority of bonds pay interest semi-annually, meaning twice a year, rather than annually. A bond is a financial contract under which the issuer owes the holders a debt and is obliged to pay them interest (the coupon) and to repay the debt at a later date, known as the maturity date.

Bonds can be issued by various entities, including corporations (corporate bonds), municipalities (municipal bonds), states (state bonds), and the federal government (Treasury bonds). When a company needs to raise money for new projects or capital, it may issue bonds directly to investors instead of seeking out a bank loan. This provides investors with regular interest payments, based on the bond's coupon rate, and the repayment of the bond's face value at maturity.

Face value is generally $1,000 for bonds in the United States, and the interest rate when the bond is issued determines how much money bondholders will receive as interest. The market's prevailing interest rates will affect the value of the bonds to investors for both current and future trades.