NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is concerned about inflation eroding the purchasing power of their fixed income investments. They are looking for an investment that offers protection against inflation while providing a consistent, albeit variable, income stream. Which of the following debt securities would be most appropriate?
- ATreasury Bonds
- BTreasury Notes
- CTreasury Inflation-Protected Securities (TIPS)
- DTreasury Bills
Show answer & explanationAnswer & explanation
Correct answer: C. Treasury Inflation-Protected Securities (TIPS)
TIPS are specifically designed to protect investors from inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI), making them ideal for the client's concern.
Why the other options are wrong
- A. Treasury Bonds are long-term bonds with fixed interest payments and do not offer inflation protection.
- B. Treasury Notes are intermediate-term bonds with fixed interest payments and do not offer inflation protection.
- D. Treasury Bills are short-term, zero-coupon instruments and do not offer inflation protection.
Treasury Inflation-Protected Securities (TIPS)
U.S. Treasury bonds designed to protect investors from inflation by adjusting the principal value of the bond based on changes in the Consumer Price Index (CPI).
- Principal value adjusts with inflation (CPI).
- Interest payments are paid on the adjusted principal, so they also increase with inflation.
- Issued by the U.S. Treasury, considered very low credit risk.
- Provide a real rate of return.
Memory trick: TIPS: Treasury Inflation Protection, Smart choice for rising prices.