Financial Accounting and Reporting-CPA Practice Exam

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Prepare for the Financial Accounting and Reporting-CPA Exam. Boost your skills with multiple choice questions and gain insights with detailed explanations and hints to succeed in your CPA journey!

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What is a primary feature of bonds?

The promise of same-day cash payments
The obligation to pay fixed interest over time
The flexibility to change interest rates
The option for early repayment without penalty

The correct answer is: The obligation to pay fixed interest over time

Bonds are a type of debt investment where the investor loans money to an entity (typically corporate or governmental) in exchange for periodic interest payments and the return of the bond’s face value when it matures. A primary feature that distinguishes bonds is the obligation to pay fixed interest over a specified period. This interest, often referred to as the coupon, is a predetermined rate that does not change throughout the life of the bond. The bond issuer is legally bound to make these payments, which makes them a reliable source of income for investors. In contrast, features such as same-day cash payments, flexibility in changing interest rates, and penalties for early repayment do not apply to standard bond agreements. Bonds typically have set payment schedules that do not include the option for early repayments without penalties, and the interest rates on bonds are fixed at issuance, providing certainty for bondholders regarding their expected cash flows. Understanding these features helps clarify the financial obligations associated with bonds and the investment strategy that often accompanies them.