Question

"Exchange-Traded Funds"

a. What advantages and disadvantages does each type of mutual fund have?

b. How does Amaral use the data on corporate bond spreads to distinguish alternative explanations for the sharp credit downturn? What does he conclude? Why?

Answer 1

a	Advantages and disadvantages of each type of mutual fund
		Advantages	Disadvantages
	Money Market Funds	Invest in ultra safe assets	Gives lower returns
	Income Funds	Provide income on a steady basis	Has tax liability due to regular income
	Bond Funds	Actively managed	subject to interest rate risk
	Balanced Funds	invest in bond and equity	lower return than equity funds
	Equity Funds	maximum possibility of returns	high volatility
	Global Funds	useful for diversification	higher costs
	Index Funds	passively managed funds, low fees	Returns don't exceed index returns
	Exchange Traded Funds	Traded like stocks	move like stocks
b	Corporate bond spreads are also known as Credit Spreads. They represent the difference
	in yield from corporate bonds vs the government bonds.
	If the credit spreads are increasing, it represents investors see higher risk in corporate bond and hence require more return.
	This signals riskiness in the economy and a possible downturn.
	If the credit spreads are narrowing, it represents investors see lesser risk in corporate bond and hence require lesses return.
	This signals economy is improving.