NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client approaches you seeking an investment that provides regular income, has a fixed maturity date, and whose value is primarily influenced by interest rate changes. They are particularly concerned about capital preservation. Which of the following investment vehicles would best fit this description?
- ACommodity Futures Contract
- BCorporate Bond
- CCommon Stock
- DReal Estate Investment Trust (REIT)
Show answer & explanationAnswer & explanation
Correct answer: B. Corporate Bond
Corporate bonds are debt securities that offer regular interest payments (income), have a defined maturity date, and their market value is inversely related to interest rate movements. They are generally considered more capital-preserving than equities or derivatives.
Why the other options are wrong
- A. Commodity futures are highly speculative derivatives, not suitable for capital preservation or regular, predictable income.
- C. Common stock offers potential for growth and dividends but lacks a fixed maturity and has higher capital risk.
- D. REITs are equity investments in real estate, offering income but no fixed maturity and higher market volatility.
Debt Securities
Financial instruments representing a loan made by an investor to a borrower (typically corporate or governmental entity) that must be repaid, usually with interest, by a certain date.
- Provide regular income (interest payments).
- Have a fixed maturity date.
- Value is inversely sensitive to interest rate changes.
- Prioritized over equity in liquidation.
Memory trick: Income, Maturity, Rates – D.E.B.T. delivers!