Of the following examples of personal investment instruments, which entails the smallest risk of losing the principal?

Rationale

Certificate of deposits entail the smallest risk of losing the principal.

Certificates of deposit (CDs) are time deposits offered by banks that provide a fixed interest rate over a specified term, and they are typically insured by the FDIC up to applicable limits, making them a very low-risk investment option compared to other instruments listed.

A (Certificate of deposits) CORRECT

As mentioned, CDs are insured by the FDIC, which protects the principal amount up to a certain limit, thereby minimizing the risk of loss. They provide a predictable return and are not subject to market fluctuations like stocks or bonds, making them the safest choice for preserving capital.

B (Common stocks) YOUR ANSWER

Common stocks represent ownership in a company and are subject to market volatility. While they can offer high returns, they also carry a significant risk of loss, especially in downturns or if the company performs poorly. The principal invested in common stocks is not guaranteed.

C (Preferred stocks) YOUR ANSWER

Preferred stocks offer dividends and have priority over common stocks in asset liquidation, but they are still vulnerable to market risks and fluctuations in company performance. Though they are typically less risky than common stocks, they do not provide the same level of principal protection as CDs.

D (Corporate bonds) YOUR ANSWER

Corporate bonds are loans made to corporations with a promise of return, but they carry credit risk depending on the issuing company’s financial health. If a company defaults, bondholders may lose part or all of their principal, making them riskier than CDs.

Conclusion

Among the given investment instruments, certificates of deposit stand out as the least risky option for preserving principal, due to their FDIC insurance and fixed returns. In contrast, common stocks, preferred stocks, and corporate bonds all involve varying degrees of risk that can affect the principal. Thus, for those prioritizing safety, CDs are the most suitable choice.

Of the following examples of personal investment instruments, which entails the smallest risk of losing the principal?

Certificate of deposits entail the smallest risk of losing the principal.

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