FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client, aged 68, is concerned about inflation eroding the purchasing power of their retirement savings. They are seeking an investment that provides a guaranteed return and protects their principal from inflation. Which of the following investments would be most suitable for this client?
- AMoney market mutual funds
- BHigh-yield corporate bonds
- CA diversified portfolio of blue-chip stocks
- DTreasury Inflation-Protected Securities (TIPS)
Show answer & explanationAnswer & explanation
Correct answer: D. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are specifically designed to protect investors from inflation. Their principal value adjusts with the Consumer Price Index (CPI), and the interest payments also increase with the adjusted principal, providing inflation protection.
Why the other options are wrong
- A. Money market funds offer liquidity and stability but typically yield low returns that often do not keep pace with inflation.
- B. High-yield corporate bonds offer higher returns but come with significant credit risk and do not provide inflation protection.
- C. Blue-chip stocks may offer growth but do not guarantee principal protection or direct inflation adjustment.
Treasury Inflation-Protected Securities (TIPS)
U.S. government bonds whose principal value is adjusted semi-annually based on changes in the Consumer Price Index (CPI).
- Principal increases with inflation and decreases with deflation.
- Interest payments are calculated on the adjusted principal, so they also increase with inflation.
- Considered very low risk as they are backed by the full faith and credit of the U.S. government.
Memory trick: TIPS are your TRIP to Inflation Protection.