What is the most appropriate investment for Todd and Diana's college fund given their risk preferences?

What is the most appropriate investment for Todd and Diana's college fund given their risk preferences?

• A. A money market checking account jointly owned by Todd and Diana
• B. A small-cap stock mutual fund owned by Mike
• C. A variable life insurance policy owned by Mike
• D. A series of investment grade zero-coupon corporate bonds owned by Todd

Answer: (D)

Investing in a series of investment-grade zero-coupon corporate bonds is particularly appropriate for Todd and Diana's college fund considering their risk preferences. These bonds are issued at a discount and do not pay periodic interest; instead, the investor receives the face value when the bond matures. This structure allows for a fixed return, providing a predictable path to savings for college expenses, which is likely a priority for Todd and Diana. Zero-coupon bonds typically carry less volatility compared to equities, making them suitable for conservative investors or those with a defined timeline for needing their investment, like funding a college education. This aligns well with the goal of preserving capital while still achieving a reasonable return, as they can be chosen to match the expected college expense timeline, ensuring that the money will be available when needed. The other investment options, while potentially beneficial in specific contexts, carry different risk profiles. For instance, a money market checking account may offer safety and liquidity but typically yields very low returns that might not keep up with inflation over the long term. A small-cap stock mutual fund, while potentially offering high returns, comes with increased volatility and is riskier, which may not align with Todd and Diana's preferences if they are looking for stability. Similarly, a variable life

Investing in a series of investment-grade zero-coupon corporate bonds is particularly appropriate for Todd and Diana's college fund considering their risk preferences. These bonds are issued at a discount and do not pay periodic interest; instead, the investor receives the face value when the bond matures. This structure allows for a fixed return, providing a predictable path to savings for college expenses, which is likely a priority for Todd and Diana.

Zero-coupon bonds typically carry less volatility compared to equities, making them suitable for conservative investors or those with a defined timeline for needing their investment, like funding a college education. This aligns well with the goal of preserving capital while still achieving a reasonable return, as they can be chosen to match the expected college expense timeline, ensuring that the money will be available when needed.

The other investment options, while potentially beneficial in specific contexts, carry different risk profiles. For instance, a money market checking account may offer safety and liquidity but typically yields very low returns that might not keep up with inflation over the long term. A small-cap stock mutual fund, while potentially offering high returns, comes with increased volatility and is riskier, which may not align with Todd and Diana's preferences if they are looking for stability. Similarly, a variable life