Which type of fixed income fund has a short duration, with the objectives of preserving capital and generating better current income than a money market fund?
Answer(s): C
A short-term bond fund combines characteristics of money market and bond funds, aiming to preserve capital while generating higher income than a money market fund due to its short duration.The feedback from the document states:"A short-term bond fund is part money market fund and part bond fund. You would expect its investment objectives to reflect this combination. A short-term bond fund's objectives are to preserve capital and generate better current income than is likely from a money market fund. Although there is some capital gain potential, you would not expect this to be a key objective given the short duration of this type of fixed-income fund."
Chapter 11 Conservative Mutual Fund ProductsLearning Domain: Analysis of Mutual Funds
What best describes why mortgage funds generally have less sensitivity to changes in interest rates than bond funds?
Answer(s): B
Mortgage funds have lower interest rate sensitivity than bond funds because mortgage rates change less frequently, and interest is paid monthly rather than semi-annually, reducing the impact of rate changes. The feedback from the document states:"Interest rate sensitivity is expected to be lower for mortgage funds than for bond funds for two reasons. First, mortgage rates change much less frequently than interest rates on bonds... Second, mortgages by nature have less interest rate risk than bonds. The reason, in part, is that interest on mortgages is paid monthly, while interest on bonds is paid semi-annually."
Recently interest rates have gone up. Your customer, Mr. Corelli, has asked you how this will affect the value of his mortgage fund. What is the best response to give to Mr. Corelli?
Fixed-income securities, including mortgage funds, decrease in value when interest rates rise because existing mortgages with lower rates become less attractive compared to new, higher- yielding mortgages. The feedback from the document states:"Fixed-income securities move in the opposite direction to market interest rates... Let's assume you are the fund manager for a mortgage mutual fund, which has mortgages paying 5%. If mortgage rates suddenly increase to 6%, only the interest rates on newly negotiated mortgages would increase... The investor would not pay you par for a 5% rate. If you wished to sell the mortgages, then you would have to lower your price until the price paid--given the 5% fixed payments to be made-- results in a return to the buyer of 6%, the `going rate' on mortgages. In other words, the market value of your par value mortgages must fall."
You are the portfolio manager for the ABC asset allocation fund. Interest rates are going up; the stock market has been very volatile recently and is forecast to continue that way for the next two quarters. What changes, if any, will you make to your current asset allocation of 50% bonds and 50% equities?
Answer(s): D
In volatile market conditions with rising interest rates, asset allocation fund managers may shift to money market securities to reduce risk. The feedback from the document states:"Asset allocation funds ideally provide a `balanced' mix of safety, income and capital appreciation... When both bond and stock markets are volatile, they will hold large amounts of money market securities. In other words, asset allocation mutual fund managers attempt to time the market to get the best returns depending on market conditions."
Chapter 12 Riskier Mutual Fund ProductsLearning Domain: Analysis of Mutual Funds
Which statement best describes key differences between dividend funds and standard equity funds?
Standard equity funds focus on capital gains and may include dividend income, but unlike dividend funds, they do not prioritize capital preservation. The feedback from the document states:"A standard equity fund seeks to earn some combination of dividend income and capital gains from investment in Canadian common stocks. This objective appears to be similar to that of a preferred dividend fund. The difference between the two is that an equity fund usually has a much stronger capital gains focus. Note as well that equity funds make no specific attempt to preserve capital; in other words, equity funds are willing to put capital at substantially greater risk than preferred dividend funds."
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