General Securities Representative (Series 7) Practice Exam

What is the main objective for an investor in income/adjustment bonds?

1. Tax benefits

2. Regular income

3. Capital appreciation

4. Safety of principal

The correct answer is: Capital appreciation

The main objective for an investor in income or adjustment bonds is typically capital appreciation. Income bonds are structured to pay interest only when the issuing company has sufficient earnings, meaning that they do not guarantee regular interest payments like other types of bonds. Therefore, investors may buy these bonds primarily for the potential increase in value, especially if the company's financial situation improves, leading to higher interest payments in the future or increased demand for the bonds themselves. Investors in these types of bonds are banking on the improvement of the company’s profitability and its subsequent ability to pay interest. The appeal lies in the possibility of capital gains if the issuer's financial circumstances stabilize or improve, making them more desirable in the market. This investment strategy often fits those who are willing to take on a bit more risk in exchange for the potential for higher returns associated with company growth. In contrast, while tax benefits can be a factor for some bonds, regular income is less applicable here due to the nature of income bonds not providing consistent payment. Safety of principal might be a concern for investors, but with income bonds, the focus shifts more towards growth rather than fixed income or principal protection.