Which bonds carry a fixed interest rate through maturity?

Which bonds carry a fixed interest rate through maturity?

• A. Fixed-rate bonds
• B. Variable-rate bonds
• C. Callable bonds
• D. Sinking Fund bonds

Answer: (A)

This question tests how coupon payments behave over the life of a bond. A fixed-rate bond has a stated coupon that stays the same from issue through maturity, so you receive the same percentage of par each year. For example, a bond with a 5% fixed coupon pays 5% of par annually no matter what market rates do. If interest rates rise or fall, the bond’s price will move to reflect those changes, but the coupon itself remains fixed for the entire term. Variable-rate (floating) bonds, on the other hand, adjust their coupon based on a reference rate, so the payments change over time. Callable bonds can have fixed coupons, but the issuer has the option to redeem the bond before maturity, which affects the total time you’re exposed to the fixed rate; the key is the call feature, not a guarantee of a fixed-rate throughout life. Sinking fund bonds involve a provision to retire portions of the issue over time, and that feature doesn’t determine whether the coupon rate is fixed. So the bond that carries a fixed interest rate through maturity is the fixed-rate bond.

This question tests how coupon payments behave over the life of a bond. A fixed-rate bond has a stated coupon that stays the same from issue through maturity, so you receive the same percentage of par each year. For example, a bond with a 5% fixed coupon pays 5% of par annually no matter what market rates do. If interest rates rise or fall, the bond’s price will move to reflect those changes, but the coupon itself remains fixed for the entire term.

Variable-rate (floating) bonds, on the other hand, adjust their coupon based on a reference rate, so the payments change over time. Callable bonds can have fixed coupons, but the issuer has the option to redeem the bond before maturity, which affects the total time you’re exposed to the fixed rate; the key is the call feature, not a guarantee of a fixed-rate throughout life. Sinking fund bonds involve a provision to retire portions of the issue over time, and that feature doesn’t determine whether the coupon rate is fixed.

So the bond that carries a fixed interest rate through maturity is the fixed-rate bond.