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1.
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.
2.
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.
3.
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.
4.
When you buy a bond, you are _______.
Lending money to a company or government. When you buy a stock you are buying ownership in a company. And how much risk you're taking on with a bond depends on its credit quality.
5.
The higher a bond's duration, _______ it responds to changes in interest rates.
The more. Duration measures a bond's sensitivity to changes in interest rates.
