Unit 3: Session 3: Types of Investment Risks

Which of the following securities are the most interest-rate sensitive? - Utility stocks - Growth stocks - Preferred stocks - Common stocks

1 & 3 - Utility and preferred stocks are the most interest-rate sensitive. Utility stocks are interest-rate sensitive because they are highly leveraged. Preferred stocks are interest-rate sensitive because they have a set dividend and fluctuate in price like bonds when interest rates change.

The net asset value of an international bond fund can be expected to increase if: - interest rates rise abroad. - interest rates fall abroad. - the U.S. dollar strengthens. - the U.S. dollar weakens.

2 & 4 - If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the U.S. dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds.

Many fixed income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A)Aa rated corporate debenture. B)Ba rated corporate mortgage bond. C)A rated general obligation muncipal bond. D)Baa rated municipal revenue bond.

A - A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

A portfolio manager using index options is trying to reduce which of the following types of risks? A)Purchasing power. B)Systematic. C)Financial. D)Selection.

B

An investor originally purchased a debt security at par value. Unfortunately, the value has fallen to $920 even though the company has reported record earnings. This decline in value would be representative of what type of risk? A)Credit risk. B)Interest rate risk. C)Purchasing power risk. D)Timing risk.

B

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be: A)Credit risk. B)Interest rate risk. C)Reinvestment risk. D)Purchasing power risk.

B - Treasury STRIPS are zero coupon bonds and, as such, have a longer duration than those paying semi-annual interest. The longer the duration, the greater the interest rate risk. Since both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk and there is no reinvestment risk with a zero coupon bond.

Which of the following risks would be associated with long-term AAA rated bonds? A)Marketability. B)Unstable interest payments. C)Purchasing power risk. D)Ability of the issuing company to pay interest and principal.

C

A portfolio manager using index options is trying to reduce which of the following types of risks? A)Purchasing power. B)Selection. C)Financial. D)Systematic.

D

Among the advantages of being the holder of secured bond is that if the issuer files for bankruptcy, you A)will receive your principal plus all unpaid interest B)are paid ahead of everyone, except past due wages to employees C)are sure to recover 100% of your investment D)are paid ahead of holders of unsecured debt as well as equity securities

D