Question

3. The maximum amount of invetment risk someone with a high risk tolerance but less than one year in time horizon should take is

a. an aggressive position.

b. a moderately aggressive position.

c. a moderate position.

d. a conservative position.

5. A financial planner who is worried that interest rates will increase should

a. increase the duration of client bond portfolios.

b. decrease the yield earned on fixed-income investments.

c. increase the average maturuity with bond portfolios.

d. decrease the duration of client bond portfolios.

6. Jamie is in the 25% combined federal and state tax bracket. She is considering purchasing either a corporate bond that yields 5.0% or a municipal bond from the state where she resides. She should purchase the corporate bond, assuming the credit quality was the same, if the municipal bond

a. yields more than 6.7%.

b. Yields more than 3.75%.

c. yields more than 5.0%.

d. yields less than 3.75%.

Answer 1

Solution -

(3) - Answer is Option A- An agrresive position

Analysis-

An aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk. ... Regardless of the investor's age, however, a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy.

(5) - Answer is Option D- decrease the duration of client bond portfolios.

Analysis-

In general, the higher the duration, the more a bond's price will drop as interest rates rise (and the greater the interest rate risk). As a general rule, for every 1% change in interest rates (increase or decrease), a bond's price will change approximately 1% in the opposite direction, for every year of duration

(6)- Answer is Option b. Yields more than 3.75%.

Analysis-

after tax effect bonds gives the following yield-

                 = 5% (1-25%) = 3.75%

corporate bond rate is given 5 % and its similar to municpal bond , which is considered risk free rate, if jamie wants to invest in any corporate bond, its yield should be higer than risk free rate of bonds (i.e munciple bond)