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Test your bond fund IQ

If you're a bond fund investor or thinking about becoming one, this quiz is for you. The volatility in the stock market has some investors looking at bonds. However, many don't realize that bonds have risks of their own. That's what American Century Group of Kansas City found out when it conducted a national telephone survey using these questions. Only seven of the 750 people questioned got all the answers right. Here's a chance to test your own knowledge. Answers are on 7H.

1. Which of the following is the definition of a bond?

a) A debt security issued by a company, municipality or government agency

b) A share of ownership in a corporation

c) A share in profits of a company

d) A mutual fund share

2. Which of the following is not a type of bond?

a) Treasury notes

b) Government National Mortgage Association securities

c) Zero-coupon securities

d) Variable annuities

3. Over the last 50 years, which type of bond has offered the best total return?

a) Long-term government bonds

b) Treasury bills

c) Long-term corporate bonds

d) U.S. Treasury inflation-indexed securities

4. Generally speaking, when interest rates rise, bond prices . . .

a) Rise

b) Fall

c) Stay the same

d) Climb exactly 10 percent

5. To evaluate a bond's performance, you should consider which of the following?

a) The interest it pays

b) Its price gains or losses

c) Both a and b

d) The bond's price-to-earnings ratio

6. Complete this sentence: The lower a bond's credit rating . . .

a) The higher the amount of interest it pays

b) The longer the maturity

c) The safer the investment

d) The lower the tax equivalent yield

7. Generally speaking, the longer a bond's maturity . . .

a) The less sensitive its price is to changing interest rates

b) The more sensitive its price is to changing interest rates

c) The more likely the issuer is to default

d) The more sensitive its price is to changes in the real estate market

8. From the following list, please identify the advantages of owning bond mutual funds over individual bonds. Generally speaking, bond mutual funds . . .

a) Are more diversified, which can reduce overall risk

b) Are easier to buy and sell

c) Have a lower minimum investment requirement

d) All of these

9. The primary benefit of a state-specific municipal bond mutual fund is . . .

a) Most of the portfolio is invested in lower-rated securities

b) The portfolio is invested in the state's most successful companies

c) Income is exempt from both federal and state taxes for state residents

d) The investment is insured by various state agencies issuing the bonds

10. A money market mutual fund . . .

a) Is guaranteed not to lose money

b) Maintains a constant share price of $1, although this is not guaranteed

c) Is insured by the U.S. government

d) Is made up primarily of long-term debt issues

_ Source: The American Century Group

Answers to bond test on 2H

% of national survey

Question Answer to answer correctly

1. a 71%

2. d 39%

3. c 30%

4. b 37%

5. c 55%

6. a 24%

7. b 14%

8. d 66%

9. c 27%

10. b 32%

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