Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
The horizontal axis of Morningstar's fixed-income style box measures a fund's ______.
Interest-rate sensitivity. It measures interest-rate sensitivity as measured by the average duration of all the bonds in its portfolio.
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.
Which is likely the better bond fund over the long term?
Fund B with a 5% yield and a 6% total return. Fund A is losing its principal (its yield is greater than its total return). Fund C is treading water. Fund B is generating more total return than yield and is thereby increasing its income payouts over time. Always focus on total return, not just yield.
5.
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.
