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Funds 406: Using Quirky Bond Funds

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1.
Treasury inflation-protected securities keep up with inflation by raising their interest rates as needed.
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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.
2.
Why do high-yield bonds offer such high income?
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They have high credit risk. These bonds offer high yields to compensate for the fact that they are big credit risks.
3.
Bank loan funds have high _______ risk.
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Credit. Because the loans come from lower-quality borrowers, the credit risk is elevated.
4.
When shopping for a junk-bond fund, credit quality is the feature you should be concerned with.
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True. Credit risk is the big risk with these funds, so an investor should be most concerned with the credit quality of the underlying bonds.
5.
Why might high-yield bond funds suffer greatly in an economic slowdown?
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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.