Controversial Ethics Question statements, government, his, therefore, following

RoastBeef

Grey recommends the purchase of a mutual fund that invests solely in long- term U.S. Treasury bonds. He makes the following statements to his clients:

Statement 1: “The payment of the bonds is guaranteed by the U.S. government; therefore, the default risk of the bonds is virtually zero.”

Statement 2: “If you invest in the mutual fund, you will earn a 10 percent rate of return each year for the next several years based on historical performance of the market.”

Did Grey’s statements violate the CFA Institute Code and Standards?

A. Neither statement violated the Code and Standards.
B. Only Statement 1 violated the Code and Standards.
C. Only Statement 2 violated the Code and Standards.
D. Both Statements violated the Code and Standards.



Edited 1 time(s). Last edit at Wednesday, May 25, 2011 at 08:30AM by me.tega.

Roflnadal

I would go with C.

cityboy

Paraguay Wrote:
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> C


I have edited the question. Check again...

mik82

This question was pulled out of the CFAI curriculum. I will post my thoughts in exactly three hours from now. Need to get back to work.

Colum

I would argue that it could be D, as you are not investing directly in US treasuries, but in a fund that supposedly invests 100% in US treasuries. That said, I would write C if I saw this on an exam, but be mad at the fact that it was asked.

mcmc

Paraguay Wrote:
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> It is still C. Guaranteeing principal and
> interest of a high quality sovereign still ok even
> given the horrible climate. Maybe the book gets
> edited in the coming years. Bunds and tbonds are
> to be considered default free.


I guess you understand my thought pattern. I might as well just post my thoughts right away. The US will said to be in a "technical default" is the debt hits $14 trillion. The US is a sovereign entity just like Greece.

If Libya had treasury securities (I think they do) I doubt that they could honor it now. If some kind of unexpected disaster happens in the US, there is a chance of default. The CFAI says that it is unethical to give any form of investment guarantee; so just because the US has guaranteed its treasuries does it mean we can re-interpret the standards based on this?

Windjam

CFAI says the answer is C

justin88

this is a simple question. statement 1 is a fact statement . statement2 is an option not a fact right logic is always only one and simple , wrong l0gics always complicated and have many variables

pennyless

C

NO EXCUSES

Analti_Calte

DDL24 Wrote:
-------------------------------------------------------
> me.tega Wrote:
> --------------------------------------------------
> -----
> > Paraguay Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > It is still C. Guaranteeing principal and
> > > interest of a high quality sovereign still ok
> > even
> > > given the horrible climate. Maybe the book
> > gets
> > > edited in the coming years. Bunds and tbonds
> > are
> > > to be considered default free.
> >
> >
> > I guess you understand my thought pattern. I
> might
> > as well just post my thoughts right away. The
> US
> > will said to be in a "technical default" is the
> > debt hits $14 trillion. The US is a sovereign
> > entity just like Greece.
> >
> > If Libya had treasury securities (I think they
> do)
> > I doubt that they could honor it now. If some
> kind
> > of unexpected disaster happens in the US, there
> is
> > a chance of default. The CFAI says that it is
> > unethical to give any form of investment
> > guarantee; so just because the US has
> guaranteed
> > its treasuries does it mean we can re-interpret
> > the standards based on this?
>
>
> So the statement that TIPS is a default risk
> free/inflation risk free instrument is incorrect?
> I thought i read it in the CFAI book or maybe
> schweser....then what do we use as risk free rate?

Stock + Put - Call