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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.
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.
3.
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.
4.
If interest rates rise, bond prices _______.
Fall. When interest rates rise, bond prices fall. Bond prices and interest rates have an inverse relationship.
5.
Evaluations of a firm's ability to pay its debts are expressed through _______.
Credit ratings. Credit ratings range from AAA down to D and provide information about a firm's ability to pay its debts.
