Question

A 25-year old client with a low risk tolerance wishes to invest in bonds. The client has invested in equities before, but has no experience investing in bonds. The BEST recommendation would be:
A. BB-rated short-term bonds
B. BB-rated intermediate-term bonds
C. AA-rated short-term bonds
D. AA-rated long-term bonds

Answer 1

Answer: C. AA-rated short-term bonds

Explanation:

It was stated that the client has a low risk tolerance. Therefore, to reduce the credit risk, investment grade bonds are appropriate (BBB or higher). To reduce the interest rate risk, short-term maturities will be preferable to long-term maturities. Both of these factors will result in a safer bond investment.