NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is concerned about inflation eroding the purchasing power of their retirement savings. Which of the following investments is generally considered the most effective hedge against inflation?
- ALong-term U.S. Treasury bonds.
- BTreasury Inflation-Protected Securities (TIPS).
- CFixed annuities.
- DHigh-grade corporate bonds.
Show answer & explanationAnswer & explanation
Correct answer: B. Treasury Inflation-Protected Securities (TIPS).
Treasury Inflation-Protected Securities (TIPS) are designed specifically to protect against inflation. Their principal value adjusts with the Consumer Price Index (CPI), and interest payments are made on the adjusted principal.
Why the other options are wrong
- A. Long-term U.S. Treasury bonds are sensitive to interest rate changes and generally perform poorly during inflation.
- C. Fixed annuities offer a fixed payout that loses purchasing power during inflationary periods.
- D. High-grade corporate bonds, like other fixed-income securities, are generally negatively impacted by inflation.
Treasury Inflation-Protected Securities (TIPS)
U.S. Treasury bonds indexed to inflation to protect investors from a decrease in purchasing power. The principal value adjusts with the Consumer Price Index (CPI).
- Principal adjusts with CPI.
- Interest payments are on the adjusted principal.
- Issued by the U.S. Treasury.
- Effective inflation hedge.
Memory trick: To beat inflation, TIPS are your best creation.