Multiple Choice
Which of the following is NOT considered a risk associated with a variable annuity contract?
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7. Receivables and Investments
Introduction to Investments in Securities
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An investor purchased a 10-year level bond. Which of the following best describes a 'level' bond in the context of investments in securities?
A
A bond whose interest payments increase each year over the 10-year period.
B
A bond that has a variable interest rate adjusted annually.
C
A bond that pays all interest and principal at maturity after 10 years.
D
A bond that pays the same amount of interest each year throughout its 10-year term.
Verified step by step guidance1
Step 1: Understand the concept of a 'level bond'. A level bond is a type of fixed-income security where the interest payments (coupon payments) remain constant throughout the life of the bond. This means the investor receives the same amount of interest each year until the bond matures.
Step 2: Compare the options provided in the problem. Analyze each description to determine which one aligns with the definition of a level bond.
Step 3: Eliminate incorrect options. For example, a bond whose interest payments increase each year or a bond with a variable interest rate does not fit the definition of a level bond, as these involve changing interest payments.
Step 4: Focus on the correct option. A bond that pays the same amount of interest each year throughout its 10-year term matches the definition of a level bond, as it provides consistent and predictable interest payments.
Step 5: Conclude that the correct answer is the option describing a bond that pays the same amount of interest each year throughout its 10-year term, as this is the defining characteristic of a level bond.
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