Question

Now that you are taking Corporate Finance, your relatives are asking you for financial advice on their investments. They are curious about bonds. Aunt Mary (age 65) is interested in the U.S. Treasury market. She thinks that Treasury Inflation-Protected Securities (TIPS) may be good for her. What would you tell her? Be specific. Your mom and dad will be retiring in five (5) years or so and feel that they shouldn’t be invested in the stock market. They ask you for advice on how to start transitioning to less risky investments, such as Treasurys and blue-chip corporate bonds. What would you tell them? Are there any funds out there you can suggest for them to consider? Be specific.

Answer 1

For answering Aunt Mary (age 65 years):

Yes, TIPS would be a go-to option for her. TIPS, as the name suggests are issued keeping inflation rates in mind. Therefore, any person invested in TIPS gets a fixed rate of interest just like any other bond plus an inflation premium if the inflation rate has increased.

These TIPS are backed by the US govt. therefore default rates are also negligible. For a woman into retirement, this would be a beneficial investment.

For answering Mom and Dad:

Yes, what they feel is correct. Because they are nearing retirement, their portfolio should consist more of treasury bonds and corporate bonds that pay a fixed rate of interest and is not prone to equity market risks.

There are funds that offer such investment options like Debt funds, TIPS, hybrid funds, etc.