Investors Flunk Bond IQ Test

November 13, 2001 ( - Although investors have fled equities for bonds in droves, their knowledge of basic fixed-income principles remains shaky, a study by American Century Investments finds.

Only 0.5% of respondents got full marks in a test comprising 10 questions on bonds and bond mutual funds, a similar result to the1998 survey. Only 27% of the sample got five correct answers, compared to 35% in 1998.

Although 63% of investors understand that a bond is a debt security issued by a company, municipality or government agency, very few understand much more about them.

Results show that:

· 29% of those surveyed believe that bond prices rise when interest rates rise
· only 31% correctly answered that bond prices fall when interest rates rise
· just over 40% incorrectly believe that the longer a bond’s maturity the less sensitive its price is to changing interest rates
· compared to 13% who know that the longer a bond’s maturity, the more sensitive its price is to changing interest rates
· only 20% of respondents believe that the lower a bond’s credit rating, the higher the amount of interest it pays
· some 15% mistakenly believe that lower credit ratings are a function of longer maturities
· while 11% think that a lower credit rating indicates that it is a safer investment than a high-credit quality bond.

Avoiding Confusion

According to the survey, confusion about bonds prevents many from investing in these securities:

· almost 30% of investors avoid bonds because they are difficult to understand
· 31% would not invest in a bond mutual fund for the same reason.


Results of the study also show that:

· almost 60% agreed that bonds help reduce risk by providing diversification
· while 58% agreed that bonds are appropriate for a retirement savings portfolio

Asked for reasons for investing in fixed-income product,

· nearly two-thirds cite diversification
· preparing for retirement was mentioned by 46%
· a drop in stock prices of more than 20% was noted by 36%

The survey was based on the results of telephone interviews with 750 investors who are primary or joint decision makers on investment issues.

Take a Bond IQ Quiz at: .