Which security carries the highest degree of purchasing power risk?

The security with the highest degree of purchasing power risk is a long-term, high-grade bond. Purchasing power risk, also known as inflation risk, refers to the risk that the money received from an investment will have less purchasing power in the future due to inflation.

Long-term bonds have fixed interest payments that remain the same throughout the life of the bond. If inflation rises, the real value of those fixed interest payments decreases, meaning the investor’s purchasing power is eroded over time. This risk is more pronounced in long-term bonds compared to short-term securities, as the longer investment horizon increases the impact of inflation on the fixed returns.

Short-term notes typically mature quickly, allowing investors to reinvest at potentially higher rates as market conditions change, thus reducing long-term exposure to inflation. Blue-chip stocks and convertible cumulative preferred stocks may provide some protection against purchasing power risk through potential price appreciation and dividend growth, thus offering a better hedge against inflation compared to fixed-income investments like long-term bonds.

Therefore, the nature of long-term high-grade bonds, with their fixed payment structure and extended duration, makes them the most vulnerable to purchasing power risk.