Choose wisely. There is only one correct answer to each question.
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1.
Why do bank loan funds have high credit risk?
The loans in the funds are from low-quality companies. Low-quality companies typically carry high risk of default.
2.
Why might high-yield bond funds suffer greatly in an economic slowdown?
Their issuers might not be able to pay interest or principal. The bonds these funds own pay high yields because there is risk that the companies backing them won't be able to meet their obligations. Such defaults are most likely to crop up in a tougher economic environment.
3.
Treasury inflation-protected securities keep up with inflation by raising their interest rates as needed.
False. They raise their principal amounts, not their interest rates. Since the interest rates remain the same, the actual amount paid to investors will rise.
4.
How do Treasury inflation-protected securities protect against inflation?
By adjusting the principal value as needed. TIPS will raise the principal in order to keep up with inflation. Since the interest rate remains the same, the actual amount paid will rise.
5.
Treasury inflation-protected securities are issued by _______.
The U.S. government. Because they are issued by Uncle Sam, they are considered very safe.
