. Each of the following is correct regarding bonds except they are
a. a form of interest-bearing notes payable.
b. attractive to many investors.
c. issued by corporations and governmental agencies.
d. sold in large denominations.
The Correct Answer and Explanation is:
Correct Answer: d. sold in large denominations.
Explanation
Bonds are a common form of long-term debt used by corporations, municipalities, and governments to raise capital. They are essentially interest-bearing notes payable, where the issuer promises to pay the bondholder a fixed interest (coupon) over a specified period and repay the principal at maturity. Let’s examine why each statement is correct or incorrect:
- a. A form of interest-bearing notes payable – This is true. Bonds are indeed a form of long-term liability. When an entity issues bonds, it is borrowing money from investors with the obligation to pay periodic interest and repay the face value on maturity.
- b. Attractive to many investors – This is also true. Bonds are appealing to investors because they typically provide a predictable income stream through interest payments. Moreover, bonds are generally considered less risky than stocks, especially government and investment-grade corporate bonds.
- c. Issued by corporations and governmental agencies – Again, true. Both public and private entities issue bonds. Corporations issue them to finance expansion, research, or operations. Governments issue bonds to fund public projects or manage budget deficits.
- d. Sold in large denominations – This is false, making it the correct choice for this question. Bonds are typically sold in small denominations, often in increments of $1,000. This lower denomination allows individual investors to purchase bonds without needing large amounts of capital, making bonds more accessible to a broader range of investors.
The idea that bonds are sold only in large denominations is a misconception. While some institutional bonds may involve large investments, the vast majority available in the retail market are structured for affordability. Thus, option d is the exception among the otherwise correct statements about bonds.
