FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client, aged 68, is concerned about inflation eroding the purchasing power of their retirement savings. Which of the following investments would be most suitable to address this concern?
- ATreasury Inflation-Protected Securities (TIPS)
- BFixed annuity
- CHigh-grade corporate bonds
- DCertificates of Deposit (CDs)
Show answer & explanationAnswer & explanation
Correct answer: A. 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 interest payments are based on this adjusted principal.
Why the other options are wrong
- B. Fixed annuities provide a guaranteed return but do not offer protection against inflation; the real value of payments can decrease.
- C. High-grade corporate bonds offer fixed interest payments, but their purchasing power is eroded by inflation.
- D. CDs offer fixed interest rates and do not adjust for inflation, meaning their real return can be negative during periods of high inflation.
Treasury Inflation-Protected Securities (TIPS)
TIPS are U.S. Treasury bonds designed to protect investors from inflation. Their principal value adjusts semi-annually based on changes in the Consumer Price Index (CPI), and interest payments are made on this adjusted principal.
- Principal adjusted by CPI.
- Interest paid semi-annually on adjusted principal.
- Issued by the U.S. Treasury, virtually no credit risk.
Memory trick: TIPS Target Inflation Protection Specifically.