Investment Planning | Lesson 5: Bonds Flashcards
Your client has expressed a desire to minimize risk exposure completely. Under the time classification of
markets listed in the reading, which instrument would best meet her requirements?
a) A 30-day call option.
b) A treasury bond with 60 days to maturity.
c) A treasury bill with 1-year maturity.
d) A 180-day commercial paper.
Answer: C
The US T-Bill is the investment listed with the least risk exposure. The treasury bond with 60 days to matu-
rity may seem like a good choice, but they are a long term investments subject to purchasing power risk.
“Series I” US Treasury Bonds would best be described to a client as:
a) Nonmarketable securities that adjust for inflation.
b) Marketable securities that adjust for inflation.
c) Nonmarketable securities that provide growth.
d) Marketable securities that provide growth to combat inflation.
Answer: A
Series I Bonds are nonmarketable savings bonds that adjust for inflation.
If a municipal bond fund is designed to be federal and state-tax-free by investing in municipal and state issues where a participant lives, how would it occur that this same municipal bond mutual fund could generate taxable capital gains?
a) Municipal bond mutual fund interest is not given the same tax-exempt status as bonds held by individual bondholders.
b) Municipal bond mutual fund profits generated through the sale of fund units to new fund participants do not
qualify for the tax exemption.
c) Municipal bond mutual fund income generated through bond sales is a taxable gain to the fund holders.
d) Municipal bond mutual funds are taxable if not issued by the state in which a participant
resides.
Answer: C
Fund managers often seek to generate additional profits for stakeholders by selling various bonds when there is an opportunity to profit from interest rate movements. Profits generated for the fund in this manner, however, are not distributed on a tax-free basis.
