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.
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.
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.
4.
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.
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.
