Which type of risk is most concerning for a retired investor dependent on bond coupons during rising costs of goods and services?

Which type of risk is most concerning for a retired investor dependent on bond coupons during rising costs of goods and services?

• A. Interest rate risk
• B. Call risk
• C. Inflation risk
• D. Credit risk

Answer: (C)

For a retired investor who relies on bond coupons for income, inflation risk is particularly concerning as it directly affects their purchasing power. Inflation erodes the value of money over time, meaning that the fixed interest payments received from bonds may not keep pace with rising costs of goods and services. If the rate of inflation exceeds the nominal yield of the bond, the real return (adjusted for inflation) can become negative, diminishing the investor's financial security and quality of life. This risk is amplified for retirees who often have limited opportunities to increase their income streams, making it crucial to consider how inflation impacts their financial needs over the long term. Other types of risks, such as interest rate risk, call risk, and credit risk, may also impact an investor's bond holdings but do not directly address the pressing concern of maintaining purchasing power in the face of rising costs.

For a retired investor who relies on bond coupons for income, inflation risk is particularly concerning as it directly affects their purchasing power. Inflation erodes the value of money over time, meaning that the fixed interest payments received from bonds may not keep pace with rising costs of goods and services. If the rate of inflation exceeds the nominal yield of the bond, the real return (adjusted for inflation) can become negative, diminishing the investor's financial security and quality of life. This risk is amplified for retirees who often have limited opportunities to increase their income streams, making it crucial to consider how inflation impacts their financial needs over the long term.

Other types of risks, such as interest rate risk, call risk, and credit risk, may also impact an investor's bond holdings but do not directly address the pressing concern of maintaining purchasing power in the face of rising costs.