Certified Plan Sponsor Professional (CPSP) Practice Exam

Investors seeking higher returns on their bond investments are likely to invest in?

1. Short duration government bonds.

2. Long duration corporate bonds below investment grade.

3. Investment-grade corporates with shorter maturities.

4. Municipal bonds with high liquidity.

The correct answer is: Long duration corporate bonds below investment grade.

Investors looking for higher returns on their bond investments typically turn to long duration corporate bonds that fall below investment grade, also known as high-yield bonds. This is because these bonds are issued by companies that have lower credit ratings, which translates into a higher default risk compared to investment-grade bonds. To compensate for this increased risk, issuers offer higher yields, allowing investors the potential for greater returns. In contrast, the other options involve either lower risk or lower returns. Short duration government bonds are considered safer but generally yield lower returns. Investment-grade corporates with shorter maturities also primarily offer lower yields due to the reduced risk associated with their credit quality and shorter time frames for interest rate sensitivity. Finally, municipal bonds with high liquidity also tend to be lower in return compared to high-yield corporate bonds, as they are often subject to lower interest rates and offer tax advantages rather than high yields. Therefore, option B is aligned with the objective of seeking higher returns within the bond market.