Question

Penny is interested in investing in corporate bonds, but she is not sure what type would be the best choice for her. She tells you that she is especially interested in buying a bond that has a relatively low level of risk and offers a steady income stream. Which of the following pieces of advice would be most appropriate for you to provide?

a. Invest in high-yield bonds
b. Diversify your bond portfolio
c. Consider μnicipal bonds
d. Choose long-term maturity bonds

Answer 1

The most appropriate advice for Penny would be to diversify her bond portfolio to reduce risk and secure a steady income stream.

Step-by-step explanation:

To achieve Penny's goal of investing in corporate bonds that have a relatively low level of risk and offer a steady income stream, the most appropriate advice would be to diversify her bond portfolio. Diversification involves investing in a mix of different corporate bonds from various companies. By spreading her investment across multiple bonds, Penny can reduce the risk associated with any individual bond defaulting and potentially losing her investment.

By choosing bonds from different companies, Penny can ensure that even if a few firms go bankrupt and do not pay, they are not all likely to go bankrupt. This strategy minimizes the risk of losing the entire investment. Additionally, diversifying her bond portfolio allows Penny to benefit from the potential steady income stream provided by different bonds.