IFYF Unit 5 Review Questions

• Introduction
• Unit 1: Basic Building Blocks of Successful Financial Management
• Unit 2: Investing Basics
• Unit 3: Finding Money to Invest
• Unit 4: Ownership Investments
• Unit 5: Fixed-Income Investing
• Unit 6: Mutual Fund Investing
• Unit 7: Tax-Deferred Investments
• Unit 8: Investing Small Dollar Amounts
• Unit 9: Getting Help: Investing Resources
• Unit 10: Selecting Financial Professionals
• Unit 11: Investment Fraud

• Study Guide
• Action Steps
• Monthly Investment Messages
• Glossary

Unit 5

Fixed-Income Investing Review Questions

1. List the characteristics of “loanership,” or fixed-income, investments?
2. List the primary reasons for purchasing fixed-income investments.
3. Aside from market and economic conditions, what two factors consistently affect the rate of interest paid on a fixed-income investment?
4. Why is accurate timing on the need for funds invested in a certificate of deposit (CD) so important?
5. Describe brokered CDs.
6. Why do most financial advisors suggest that you avoid equity-indexed CDs?
7. List the characteristics of Series EE and I bonds that contribute to their long-standing popularity with investors.
8. How do the earnings on Series EE, I, and HH bonds differ?
9. Define interest rate risk and call risk. What risks do they represent for the bond investor?
10. ABC Mutual Fund is offering a “high yield” bond fund. What might this tell you about the bonds in the portfolio?
11. Define “reciprocal immunity.” How does this affect fixed income investors?
12. Summarize the characteristics of Treasury bills and Treasury notes.
13. What are the unique characteristics of municipal bonds?
14. Why is a mortgage bond considered safer than a debenture?
15. What are the primary advantages and disadvantages of convertible bonds?
16. List the unique characteristics of zero-coupon bonds. How can an investor avoid the annual taxation on the increase in the bond value?
17. Characterize bond unit investment trusts (UITs), noting advantages and disadvantages of this fixed-income investment.
18. What key factors are important when selecting a bond mutual fund? What advantages might a bond index fund offer?
19. What advice should conservative investors follow when choosing a bond fund?
20. Why are mortgage-backed securities called “pass through” securities? What potential problems might investors encounter with these securities?
21. What are the similarities and differences in Ginnie Mae, Freddie Mac, and Fannie Mae mortgage-backed securities?
22. How do collateralized mortgage securities (CMOs) compare to other mortgage-backed securities?
23. Characterize variable and fixed annuities. What should investors remember when purchasing an annuity?
24. Preferred stock is sometimes referred to as a “hybrid” investment. Why? (
25. Although GICs, or “stable value funds” offer several benefits, most notably a slightly higher return than CDs and other cash investments, experts often discourage their use for long-term financial goals like retirement. Why?

Just Do It!! Acting on What You Learned

Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”

Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.

1. Visit the Internet sites noted in this unit to learn more about Series I, EE, and HH Savings Bonds http://www.publicdebt.treas.gov. Note that you can purchase bonds with a credit card. Be sure to check on the tax benefits as well as the income limits and other restrictions on purchasing Series I and EE bonds for qualified higher education expenses. Also, check with your Human Resources or Personnel Office to learn if there are procedures for purchasing bonds through payroll deduction.

2. To learn more about money market mutual funds, visit http://www.ibcdata.com. Review the tutorial on money market mutual funds as well as the comparisons of high yielding funds and the search tools. For additional information, visit the Internet sites of any of the larger mutual fund companies to learn more about their individual money market products. Don’t get discouraged if some companies require high minimum initial deposits to open an account (some as high as $10,000). There are quality money market mutual funds that require much smaller balances and pay a higher yield than available with traditional bank or credit union products.

3. Visit the Internet sites of some of the larger mutual fund companies, such as those listed below, or others of your choice. Explore the sites to determine which companies offer a municipal bond fund for your state of residence. Compare the funds to determine yields, rankings, historical performance, expense ratio, and other relevant information.

• http://www.dreyfus.com
  • Dreyfus
• http://www.fidelity.com
  • Fidelity Investments
• http://www.vanguard.com
  • The Vanguard Group
• http://www.troweprice.com
  • T. Rowe Price

4. To learn more about all aspects of bond investing, visit the following websites:

• http://www.bondsonline.com/
• http://www.investinginbonds.com/

5. Visit the Internet site http://www.kiplinger.com to locate several calculators useful to bond investors. From the main page, select the page for Tools. From there, scroll to the section titled Bonds. Calculators are available for a number of bond questions including comparisons of tax exempt and taxable bond choices, purchase decisions on zero-coupon bonds, and estimates of how rate changes will affect current bond values.

6. It is important to match the characteristics of an investment tool, or product, to the job, or goal, you want to accomplish. Review this unit and the characteristics of fixed-income investments to answer the following questions:

• Which offer the benefit of tax-exempt earnings?
• Which offer the benefit of tax deferral?
• Which offer the option to get principal and interest returned annually?
• Which pay interest semi-annually?
• Which pay interest periodically?
• Which offer no interest payment, or return, until maturity?
• Which offer immediate, although limited in scope, diversification?