A client, age 70, is retired and relies on their investment portfolio for current income. They have a conservative risk tolerance and are primarily concerned with capital preservation and generating consistent monthly income. Which of the following investment products is LEAST suitable for this client?
- AA diversified portfolio of investment-grade municipal bonds.
- BA fixed annuity.
- CA portfolio of high-yield corporate bonds.
- DA money market fund.
Show answer & explanationAnswer & explanation
Correct answer: C. A portfolio of high-yield corporate bonds.
The client is 70, retired, conservative, and prioritizes capital preservation and consistent income. High-yield corporate bonds (junk bonds) carry significantly higher credit risk and price volatility compared to investment-grade bonds. While they offer higher income, the increased risk of default and capital loss makes them unsuitable for a conservative investor focused on capital preservation. Investment-grade municipal bonds, fixed annuities, and money market funds are all generally suitable for such a client.
Why the other options are wrong
- A. Investment-grade municipal bonds offer relatively safe, consistent income and capital preservation, making them suitable.
- B. Fixed annuities provide guaranteed income and principal protection, which is suitable for a conservative, income-focused client.
- D. Money market funds offer liquidity and capital preservation, suitable for a conservative client's cash management needs.
Unsuitable High-Yield Bonds (Conservative Client)
High-yield corporate bonds (junk bonds) are generally unsuitable for conservative investors, especially retirees focused on capital preservation and consistent income, due to their higher risk of default and price volatility.
- Higher default risk than investment-grade bonds.
- More volatile than investment-grade bonds.
- Not suitable for capital preservation focus.
- Income is higher but comes with greater risk.
Memory trick: Safety first for retirees; avoid the high-risk, high-yield traps.