Question

A customer has an existing portfolio that is mainly invested in high quality corporate bonds for stable income. As market interest rates have dropped, the customer's income has declined and she would like to allocate part of the portfolio to corporate bonds that offer potential growth. The BEST recommendation is to buy:

Answer 1

Complete question:

A customer has an existing portfolio that is mainly invested in high quality corporate bonds for stable income. As market interest rates have dropped, the customer's income has declined and she would like to allocate part of the portfolio to corporate bonds that offer potential growth. The BEST recommendation is to buy:

a). convertible debentures

b). equipment trust certificates

c) long term zero coupon bonds

d). commercial paper

Answer:

a). convertible debentures

Explanation:

Convertible debentures also known as convertible bonds, are a form of long term bonds, they are the type of bonds that can be converted into common stock or cash of equivalent value by the issuing company.

In this case, the customer has an existing portfolio that is mainly invested in high quality corporate bonds. The customer's income declined as a result of drops in market interest rates. The best recommendation to buy would be convertible bonds, because, when markets interest rate rises, value of the cutomer's convertible bond also rises. Here there is always a potential for growth. But this cannot be said for the other three options (equipment trust certificates, long term zero coupon bonds and commercial paper).

Thus the best recommendation would be to buy convertible debentures.

Option A is correct