NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
An investment adviser is constructing a portfolio for a client who is primarily concerned with preserving capital and generating a steady, predictable income stream. The client has a very low risk tolerance and is willing to accept modest returns in exchange for stability. Which type of fixed-income investment would be most appropriate for this client?
- AInvestment-grade corporate bonds
- BEmerging market sovereign bonds
- CConvertible bonds
- DHigh-yield (junk) bonds
Show answer & explanationAnswer & explanation
Correct answer: A. Investment-grade corporate bonds
Investment-grade corporate bonds are issued by financially stable companies, offering lower default risk and more predictable income compared to higher-risk alternatives, aligning with a client's desire for capital preservation and steady income with low risk.
Why the other options are wrong
- B. Emerging market bonds are subject to geopolitical and currency risks, making them unsuitable for a low-risk, capital preservation objective.
- C. Convertible bonds have equity-like features and higher price volatility, which would not align with a low-risk, capital preservation objective.
- D. High-yield bonds carry significantly higher default risk and are not suitable for a low-risk tolerance client focused on capital preservation.
Investment-Grade Fixed Income
Bonds issued by highly rated corporations or governments, characterized by lower default risk and generally lower yields compared to speculative-grade bonds.
- Credit ratings typically BBB- (S&P/Fitch) or Baa3 (Moody's) or higher.
- Lower default risk, higher credit quality.
- Suitable for conservative investors seeking capital preservation and income.
- Examples: U.S. Treasuries, highly rated corporate bonds, municipal bonds.
Memory trick: For safety and income, investment grade is the way, avoiding the junk that might make you pay.