Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for ADFP Test. Use flashcards and multiple choice questions, each with hints and explanations for better understanding. Start studying today!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

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Which risk is associated with money market mutual funds?

High interest rate risk
High credit risk
Minimal interest rate risk
Significant systemic risk

The correct answer is: Minimal interest rate risk

Money market mutual funds are designed to be low-risk investment options, typically investing in short-term, high-quality debt instruments. The primary characteristic of these funds is their minimal interest rate risk. This means that the potential impact of rising or falling interest rates on the value of the fund's assets is limited compared to longer-term investments, as the instruments held by money market funds generally have short maturities. The short duration of the underlying assets, such as Treasury bills and commercial paper, helps stabilize the value of the fund even when interest rates fluctuate. As the fund's investments mature or are rolled over into new instruments, the impact of any changes in interest rates is moderated due to the shorter time frame. Therefore, the correct understanding highlights that money market mutual funds are structured to minimize interest rate risk, making option C the most accurate choice.