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 looking for an investment that provides income and potential for capital appreciation while protecting against inflation. Which of the following investments would be MOST suitable?
- APreferred Stock
- BLong-term U.S. Treasury Bond
- CHigh-yield Corporate Bond Fund
- 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 semi-annually based on changes in the Consumer Price Index (CPI), and the interest payments are then paid on this inflation-adjusted principal, providing both income and inflation protection.
Why the other options are wrong
- A. Preferred stock typically offers fixed dividends and does not inherently protect against inflation; its value can be negatively impacted by rising rates.
- B. Long-term Treasury bonds are subject to interest rate risk and do not offer direct inflation protection.
- C. High-yield corporate bond funds carry significant credit risk and are not designed for inflation protection, though they offer higher income, which could be eroded by inflation.
Treasury Inflation-Protected Securities (TIPS)
U.S. Treasury bonds that provide protection against inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI).
- Principal adjusts with inflation (CPI).
- Fixed coupon rate is paid on the adjusted principal.
- Ideal for investors seeking inflation protection and a real return.
Memory trick: TIPS: Treasury 'I'nflation 'P'rotected 'S'ecurities – they're 'S'afe from price surges.