Which of the following scenarios would represent a risk for fixed-income investors?

When considering fixed-income investments, one of the primary risks investors face is inflation risk, which is effectively represented by a rising Consumer Price Index (CPI). When inflation increases, the purchasing power of the fixed payments from bonds decreases.

Fixed-income securities, such as bonds, typically provide a set interest payment and only return the principal amount upon maturity. If the CPI rises significantly, this means that the prices of goods and services are increasing, eroding the real value of the interest payments and principal return received by the investor. Consequently, if inflation exceeds the coupon rate of the bond, the real return may be negative, making it a significant risk for fixed-income investors.

In contrast, scenarios like stable economic growth, decreasing interest rates, and rising employment levels generally present favorable conditions for fixed-income investors. Stable economic growth can lead to predictable income and investments, decreasing interest rates often cause bond prices to rise, and rising employment levels can indicate a strong economy, which usually supports stable to positive returns for fixed-income investments. Thus, these factors do not introduce the same degree of risk that inflation does.