Do You Know TheseTop 10 Fixed-Income Facts? @ (NAPSA)—Does this current shaky financial market have you confused and uncertain about which investments are best for you? Use this quick quiz to help educate yourself about bond (fixed-income) investment opportunities in the current environment. Answer True or False for questions 1 through6: 1. Municipal bonds typically pay out less income (that is, they yield less) than similar maturity Treasury bonds. 2. When the yield curve—a chart representing the relationship between bondyields and their maturities—becomes steeper, it meansinvestors can get paid more for taking on more maturity risk (1.e., by buying longer-term bonds). 3. When interest rates go up, bond valuesor prices also go up. 4. In the current market, taxfree municipal bond funds remain attractive investments. 5. The fixed-income market offers attractive investmentalter- natives for investors with higher risk/return appetites and longer investment horizons. 6. In environments of extended economic weakness and stock mar- ket underperformance, investors mayfind fixed-income investments help offset negative returns in their stock holdings. 7. Which of the following fac- tors poses a risk to U.S. bond investors? A. Rising interest rates/inflation B. Rising default rates on debt C. Depreciation of the U.S. dollar D. All of the above 8. Which of the following fixedincome investments is likely to perform best in a rising interest rate environment? A. U.S. Treasury bonds B. High-yield bonds C. Municipal bonds D. Floating-rate bank loans 9. Which of the following fixed- income investments have the primary risks that face all bond greatest credit risk? A. 10-Year holders. Though credit risk or risk of default may be perceived to be ipal bonds C. High-yield bonds D. fixed-income sectors already reflect 10. What is the proper alloca- tion mix between stocks and bonds Thus, investors may find adjusted ylelds to maturity for bonds quite percent stocks; 40 percent bonds bonds, the value of floating-rate loans is generally not affected by U.S. Treasuries B. 10-Year municFloating-rate bank loans for the average investor? A. 50 percent stocks; 50 percent bonds B. 60 C. 30 percent stocks; 70 percent bonds D. 100 percent stocks; 0 percent bonds E. 0 percent stocks; 100 percent bonds? Answers 1. True. Because they are taxexempt and thus offer higher after- the greatest risk, prices in many extreme default rate scenarios. compelling. 8. D. Unlike fixed-rate changes in interest rates. That’s because loan rates reset regularly to maintain a fixed spread over widely accepted base rates, such as the London-Interbank Offered Rate. This is used by banks worldwide as a base for loans to large cally yield less on a pretax basis commercial and industrial companies and is generally quoted for 30, bonds. 2. True. Steepening yield bonds are generally unsecured and term municipal bonds get higher yields, but hurts those holding long-term municipal bonds issued loans. 10. B. A widely accepted tax returns, municipal bonds typi- versus similar maturity Treasury rates mean new investors in long- at lower yields. 3. False. When interest rates rise, the price (value) of the bond declines. 4. True. Typically, municipal bonds issued by city, county or state governments provide a lower yield than comparable Treasury bonds. 5. True. For investors with a higher-risk appetite and an intermediate to long-term investment horizon, believe floating-rate loans, high- quality municipal bonds and highyield bonds could offer equity-like returns given the severe dislocations in each of these debt mar- kets. 6. True. Even in an unprecedentedly volatile market, the performance of many bond asset 60 and 90 days. 9. C. High-yield rank junior to floating-rate bank portfolio allocation for the average “moderate” investor would be 60 percent stocks and 40 percent bonds. While, during market volatility, portfolio allocations may be pushed out of balance by mar- ket shifts, the historical basis for maintaining a diversified portfolio holds true. Investors should consult their financial advisor about taking advantage of dramatic swings in asset performance to rebalance portfolios for risk and tax purposes. Your Income IQ 8-10: “Fixed-Income Fellow” 5-7: “Fixed-Income Friend” 0-4: “Fixed-Income Freshman” This quiz comes from the that of the S&P 500. Diversifica- experts at Eaton Vance Corp., a Boston-based investment management firm, traded on the New York and foreign currency risk are the For more information, visit www.eatonvance.com. classes can be less negative than tion into fixed income has generally benefited equity investors. 7. D. Interest rate risk, credit risk Stock Exchange under the symbol EV.
