Al is retired and enjoys his daily life.His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living.Although he has sufficient principal to live on,he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income.Which one of the following bonds should best ease Al's concerns?

Question

Quizplus · Accepted Answer

Al's concern is the purchasing power of his income. So, he should look for a bond that offers protection against inflation. The best choice for him is a TIPS (Treasury Inflation-Protected Securities) bond. TIPS are designed to protect against inflation by adjusting the bond's principal value in response to changes in the Consumer Price Index (CPI). As inflation increases, the principal value of the bond increases, thereby increasing the interest income paid to him. Therefore, a 5-year TIPS bond is the best choice for Al.

Al Is Retired and Enjoys His Daily Life