HKSI Paper 12 Overview of the asset management industry question: trade in minimum lots of US$200,000

HKSI Paper 12Overview of the asset management industry

Mrs Wong has HK$50,000 to invest and wants exposure to about 150 Asian corporate bonds, most of which trade in minimum lots of US$200,000. What does a bond fund mainly offer her?

A Return of the par value of her units on a fixed maturity date, as with holding the bonds herself
B Diversification across many bond issuers, which she could not build for herself from HK$50,000 alone
C A proportionate share of each of the 150 bonds, registered in her own name by the fund's custodian
D Income at a fixed rate equal to the average coupon of the bonds the fund holds, paid each quarter

Show the answer and explanation

Answer: B. Diversification across many bond issuers, which she could not build for herself from HK$50,000 alone

With HK$50,000 Mrs Wong cannot buy even one lot of US$200,000, let alone 150 issues. A fund pools many investors' money so that each holds a proportionate share of a diversified portfolio, which spreads issuer-specific risk. An open-ended bond fund has no maturity date and no par value to repay: its unit price moves with bond prices and defaults. Unitholders own units in the fund, not the bonds; the trustee or custodian holds the bonds for the fund (UT Code 4.5(a)), not in each investor's name. Any distributions follow the fund's distribution policy and income, so they are not a fixed coupon. Source: Standard managed-fund principles; UT Code 4.5(a) (custody of scheme property) (as at October 2026).

Common mistake

Assuming a bond fund protects capital like holding one bond to maturity. A fund has no maturity date and no guarantee.

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