Practice Quiz

Financial Planner

Category - Investment Planning

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In 1985, the Treasury introduced a zero coupon bond called STRIPS; they are direct obligations of the federal government. Your client is interested in investing a sum of funds that can grow tax-free and is concerned about bond volatility, what should you inform your client about STRIPS?
  1. STRIPS are can be volatile, but grow tax-free
  2. STRIPS are non-volatile, but grow tax-free
  3. STRIPS are can be volatile, but do not grow tax-free
  4. STRIPS are non-volatile, but do not grow tax-free
Explanation
Answer: C - A client wanting to invest in STRIPS should be informed that STRIPS can be volatile, but do not grow tax-free. However, the client should also be informed that STRIPS can be purchased through retirement accounts. STRIPS bought in this fashion are recommended since the taxed interest is taxed during the retirement years when tax brackets are lower. These bonds are more volatile than other government bonds during periods changing interest rates; therefore it is best to purchase them when interest rates are expected to fall.
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