Advanced Diploma of Financial Planning (ADFP) Practice Test

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True or False: Regular coupon payments from bonds generally ensure stability.

True
False
Only for municipal bonds
Subject to interest rates

The correct answer is: False

While regular coupon payments from bonds can provide a predictable income stream to investors, they do not guarantee stability in the broader sense. The value of bonds is subject to market conditions, including interest rate fluctuations, credit risk, and economic changes. When interest rates rise, for instance, the prices of existing bonds typically fall, which can lead to volatility in the bond market. Therefore, while the coupons may offer consistent payments, they do not ensure that the overall investment remains stable in terms of market value or purchasing power over time. The notion of stability in investments usually encompasses more than just regular income from coupon payments; it also involves the preservation of capital, consistent growth, and limited exposure to significant fluctuations in value. Hence, the assertion that regular coupon payments from bonds ensure stability is inaccurate, as they do not account for these broader market dynamics.