Choose wisely. There is only one correct answer to each question.
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1.
Bond funds with high expense ratios _______.
Both of the above. To overcome high expenses, bond fund managers generally take on more risk to keep their yields and returns competitive.
2.
Which is least important when evaluating bond funds?
Their yields. Yield is nothing more than a percentage of principal, so it's more important to examine a fund's total return than its yield. Further, expenses are perhaps the most important factor to consider when investing in bond funds.
3.
The vertical axis of Morningstar's style box measures a fund's _______.
Credit quality. It is broken into three groups: high, medium, and low.
4.
Morningstar's fixed-income style box visually depicts a fund's _______.
Credit quality and duration. While examining total return and expenses is important, our style boxes show the characteristics of the securities that funds own--in this case, duration and credit quality.
5.
According to Morningstar, which bond fund would be the best choice?
Fund C with an expense ratio of 0.5%, a duration of seven years, and an average credit quality of AA. First of all, Fund C is the lowest costing of the group, and cost is the most important factor when evaluating bond funds. Next, its duration is lower than Fund A's, so it's not taking on as much interest-rate risk as Fund A is.
