Bonds are an investment option for community associations. Which statement is true?

• A. Bonds are an investment option that can yield more or less than their stated rate, and their price fluctuates with interest rates.
• B. Bonds are a form of insurance.
• C. Bonds are used to fund daily operating expenses.
• D. Bonds guarantee no risk.

Answer: (A)

Bond investments hinge on how market rates affect price and yield. The coupon rate on a bond is fixed, giving you predictable interest payments, but the actual return you realize depends on the price you pay for the bond. If you buy at a premium (more than the face value), your yield ends up lower than the coupon; if you buy at a discount (less than face value), your yield is higher than the coupon. Bond prices move in the opposite direction of interest rates: when prevailing rates rise, existing bonds with fixed coupons become less attractive and their prices fall; when rates fall, prices rise. This is why bonds can yield more or less than their stated rate and why their price fluctuates with interest rates. Bonds are not insurance and are not typically used to cover daily operating expenses; they are debt instruments with varying risk, so they’re not guaranteed zero risk.