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1.
Which of the following bond funds is taking on the most interest-rate risk?
The fund with a seven-year duration and an average credit quality of AAA. Duration is the indicator of interest-rate risk. The longer the duration, the more sensitive a fund is to interest-rate changes.
2.
If interest rates rise, bond prices _______.
Fall. When interest rates rise, bond prices fall. Bond prices and interest rates have an inverse relationship.
3.
Which of the following bond funds is taking on the most credit risk?
The fund with a five-year duration and an average credit quality of B. Credit quality is the indicator of credit risk. A fund with an average credit quality of B is taking on more credit risk than one with investment-grade quality such as A or AAA.
4.
Duration measures a bond's _______.
Interest-rate sensitivity. Duration measures a bond's interest-rate sensitivity. Credit quality is itself a measure of the creditworthiness of the company that issued the bond. Yield is based on the income the bond pays to its owners.
5.
High-yield bonds will do poorly when _______.
There's a recession. Lower-rated high-yield bonds will do poorly during a recession, as issuers will have a tougher time meeting their high debt payments.
