General Securities Representative (Series 7) Practice Exam

What is the term used when the value of a bond decreases from its purchase price over time?

1. Depreciation

2. Amortization

3. Accretion

4. Capital loss

The correct answer is: Amortization

The term that accurately describes the phenomenon where the value of a bond decreases from its purchase price over time is capital loss. Capital loss occurs when an investment's market value drops below the amount initially paid for it, leading to a loss if the asset is sold at that lower price. Amortization, on the other hand, refers to the gradual reduction of a debt over time through regular payments, which often include both principal and interest components. This concept is typically applied in the context of loans and not directly to the decreasing value of bonds. Depreciation, while often confused with capital loss, typically applies to tangible fixed assets like machinery and equipment, not financial securities like bonds. Depreciation measures the economic reduction in value over time due to wear and tear or obsolescence. Accretion refers to the gradual increase in the value of a bond or its yield over time, especially in the context of zero-coupon bonds where there are no periodic interest payments. Instead, the bond is sold at a discount and increases to its face value upon maturity. Considering these distinctions, capital loss is the correct term to describe the decrease in value of a bond from its initial purchase price.