American Century Investments Releases Results of Bond IQ Test and Bond Attitudes Study; As Bonds Grow in Popularity, Knowledge of Fixed-Income Basics Slips.

Business Editors

MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Nov. 13, 2001

Even though increased numbers of investors have sought refuge in bonds and bond mutual funds this year, their knowledge of basic fixed-income principles remains poor, according to a new American Century Investments survey.

In a national telephone survey of 750 investors who are primary or joint decision makers on investment issues, only four respondents -- roughly 0.5% -- were able to correctly answer all of a 10-question "test" on basic knowledge about bonds and bond mutual funds. This year's results resembled those in 1998 -- the first year of the American Century Investments "Bond IQ Quiz" -- when only seven respondents were able to answer all 10 questions correctly. However, overall knowledge of bonds and bond mutual funds has dropped substantially over the past three years. Only 27 percent of those surveyed were able to answer at least half of the 10 questions correctly this year, compared to 35 percent in 1998.

No Passing Grade

"Even in a year when U.S. bond mutual funds are expected to outsell domestic stock funds, there continues to be a high degree of confusion and mystery surrounding bonds," said Colleen Denzler, vice president and senior portfolio manager of American Century Investments. "Although 63 percent of investors correctly described a bond as a debt security issued by a company, municipality or government agency, disturbingly few understand the relationship between the direction of interest rates and bond performance, credit quality and bond yields, and bond maturity and interest-rate sensitivity."

For example:

-- Some 29 percent of those surveyed believe that bond prices rise when
interest rates rise, while only 31 percent correctly answered that bond prices
fall when interest rates rise.

-- Forty-one percent of respondents have the relationship between maturity and
price sensitivity reversed, thinking that "the longer a bond's maturity the
less sensitive its price is to changing interest rates." Only 13 percent
correctly answered that the longer a bond's maturity, the more sensitive its
price is to changing interest rates.

-- Only 20 percent of surveyed investors understand that "the lower a bond's
credit rating, the higher the amount of interest it pays." Fifteen percent
believe that lower credit ratings are a function of longer maturities while 11
percent think that a lower credit rating indicates that it is a safer
investment than a high-credit quality bond.

Confusion Causes Inaction

Confusion about bonds apparently prevents many from actually investing in bonds and bond funds, according to the "Bond Attitude" portion of the study. Almost 30 percent of investors indicated that they avoid bonds because they are difficult to understand, and 31 percent indicated that they would not invest in a bond mutual fund for the same reason.

"Knowledge about bonds can add value to an investor's portfolio, as classic allocation models suggest that nearly everyone needs at least some fixed-income exposure." Adds Denzler, "Investors can clearly better their financial positions by learning more about bonds, whether they access the abundance of resources offered by financial service companies via the Internet or by consulting a financial advisor."

To help facilitate better understanding of bond and bond mutual funds, American Century Investments offers a number of web-based tools including easy-to-understand articles, guides and calculators at www.americancentury.com. The site also allows investors to test their own knowledge of bond basics with the Bond IQ Quiz.

Investors Embrace Diversification

"It's definitely good news that a majority of investors readily acknowledge the important role bonds and bond funds play in diversifying an investment portfolio, even if those same investors truly may not understand bond basics," Denzler added. Almost three out of five (57 percent) agreed that bonds help reduce risk by providing diversification, while 58 percent agreed that bonds are appropriate for a retirement savings portfolio. In fact, nearly two-thirds (62%) of investors indicate that diversification is a key reason why they would invest in fixed-income products. Preparing for retirement as one ages and a drop in stock prices of more than 20% are also likely to prompt some investors (46% and 36%, respectively) to increase bond or bond fund holdings.

Bonds Versus Bond Funds

"As a group, respondents scored highest when asked about the basic advantages of bond funds versus bonds," Denzler said. "Roughly two-thirds of investors answered that the combination of diversification, liquidity and low minimum investments made bond fund ownership generally more appealing than individual bonds."

Investors seemed less informed about the benefits of state-specific municipal bond mutual funds. Only 28 percent of respondents cited federal and state income tax exemption as the primary benefit of state-specific muni funds. Roughly one-quarter of responding investors incorrectly answered that a state-specific muni fund's holdings are insured by state agencies that issue individual bonds. Another 11 percent believe that a municipal bond fund's portfolio is invested in "the state's most successful companies."

Survey Background

The results of American Century's Bond IQ Test and Bond Attitude Study were drawn from telephone interviews with 750 investors selected through a random digital dial process. Respondents -- all of whom have investments either inside or outside of a company plan -- were screened to ensure that they are the primary or joint decision-maker for investment issues and that they are not employed in the banking, mutual fund, financial services or marketing research industries. Custom Research Inc., a national marketing research firm, conducted the interviews. The results are significant within +/- 3% at a 90% confidence level.

American Century is a premier investment manager serving nearly two million individual and institutional investors. Through its broad selection of mutual funds and separate accounts, the Kansas City, Mo.-based company manages more than $85 billion in assets. James E. Stowers, Jr. founded the company in 1958 and serves as chairman. His son, James E. Stowers III, is co-chairman and William M. Lyons is president and chief executive officer. For the past two years, American Century has been selected as one of FORTUNE Magazine's 100 Best companies to work for in America. For additional information visit www.americancentury.com.

This information is for educational purposes only and is not intended to recommend any particular investment product or service.

AMERICAN CENTURY INVESTMENTS 2001 BOND IQ QUIZ

Following are results of the Bond IQ quiz, which was given to 750 American investors. Percentages have been combined on questions where test participants indicated they "didn't know" or refused to respond. Correct answers are in all capital letters.

1.  Which of the following is the definition of a bond?
      --  A DEBT SECURITY ISSUED BY A COMPANY, MUNICIPALITY OR
        GOVERNMENT AGENCY                                        63%
      --  A share of ownership in a corporation                     6%
      --  A share in profits of a company                           7%
      --  A mutual fund share                                       9%
      --  Don't know/refused                                       15%

2.  Which of the following is not a type of bond?
                              ---
      --  Treasury notes                                            9%
      --  Government National Mortgage Association securities      12%
      --  Zero coupon securities                                   10%
      --  VARIABLE ANNUITIES                                       36%
      --  Don't know/refused                                       33%

3.  Over the last 50 years, which type of bond has offered the best
    total return?
      --  Long-term government bonds                               16%
      --  Treasury bills                                           11%
      --  LONG-TERM CORPORATE BONDS                                27%
      --  U.S. Treasury inflation-indexed securities                9%
      --  Don't know/refused                                       37%

4.  Generally speaking, when interest rates rise, bond prices...
      --  Rise                                                     29%
      --  FALL                                                     31%
      --  Stay the same                                            18%
      --  Climb exactly 10 percent                                  2%
      --  Don't know/refused                                       20%

5.  To evaluate a bond's performance, you should consider which of
    the following:
      --  The interest it pays                                     11%
      --  Its price gains or losses                                 6%
      --  BOTH THE INTEREST IT PAYS AND ITS PRICE GAINS OR LOSSES  44%
      --  The bond's price-to-earnings ratio                       21%
      --  Don't know/refused                                       18%

6.  Please complete the following sentence.  The lower a bond's
    credit rating...
      --  THE HIGHER THE AMOUNT OF INTEREST IT PAYS                20%
      --  The longer the maturity                                  15%
      --  The safer the investment                                 11%
      --  The lower the tax-equivalent yield                       15%
      --  Don't know/refused                                       39%

7.  Generally speaking, the longer a bond's maturity...
      --  The less sensitive its price is to changing interest
            ----
        rates                                                    41%
      --  THE MORE SENSITIVE ITS PRICE IS TO CHANGING INTEREST
            ----
        RATES                                                    13%
      --  The more likely the issuer is to default                  3%
      --  The more sensitive its price is to changes in the real
        estate market                                            10%
      --  Don't know/refused                                       33%

8.  From the following list, please identify the advantages of
    owning bond mutual funds over individual bonds.  Generally
    speaking, bond mutual funds...
      --  Are more diversified which can reduce overall risk       20%
      --  Are easier to buy and sell                                2%
      --  Have a lower minimum investment requirement               3%
      --  ALL OF THESE                                             62%
      --  Don't know/refused                                       13%

9.  The primary benefit of a state-specific municipal bond
    mutual fund is...
      --  Most of the portfolio is invested in lower-rated
        securities                                                5%
      --  The portfolio is invested in the state's most successful
        companies                                                11%
      --  THE INCOME IS EXEMPT FROM BOTH FEDERAL AND STATE TAXES
        FOR RESIDENTS OF THE STATE                               28%
      --  The investment is insured by the various state agencies
        issuing the bonds                                        24%
      --  Don't know/refused                                       32%

10. A money market mutual fund...
      --  Is guaranteed not to lose money                          10%
      --  USUALLY MAINTAINS A CONSTANT SHARE PRICE OF A DOLLAR,
        ALTHOUGH THIS IS NOT GUARANTEED                          25%
      --  Is insured by the U.S. government                        18%
      --  Is made up primarily of long-term debt securities        21%
      --  Don't know/refused                                       26%