SIE (Securities Industry Essentials) Practice Exam 2025 - Free SIE Practice Questions and Study Guide

While Treasury bonds are often regarded as low-risk investments backed by the government, they carry significant exposure to inflationary risk. When inflation rises, the purchasing power of the fixed interest payments from Treasury bonds diminishes. Therefore, if inflation exceeds the bond's interest rate, investors effectively lose money in real terms.

In periods of high inflation, the fixed income from Treasury bonds does not increase, while the cost of goods and services rises, reducing the overall value of the interest payments received. This makes Treasury bonds particularly vulnerable when inflation expectations are high.

Other choices, like corporate stocks, municipal bonds, and commodities, react differently to inflation. For example, stocks may adjust and potentially increase in value as companies raise prices to keep up with inflation, while commodities often gain value during inflationary periods. Municipal bonds may also be somewhat insulated from inflation risk, particularly if they are tied to variable interest rates or inflation-indexed rates. Therefore, Treasury bonds stand out for their direct exposure to inflationary risks, making them the most affected by changes in inflation rates.