What kind of risk is primarily associated with fixed-income investments?

The correct answer focuses on inflationary risk as the primary concern for fixed-income investments. Fixed-income securities, such as bonds, typically pay a fixed interest rate over time. However, the purchasing power of the income they generate can diminish if inflation rises. This means that while investors receive the same nominal interest payments, the real value of those payments decreases in an inflationary environment, reducing their overall return on investment in terms of purchasing power.

Although fixed-income investments can also be affected by market risk, credit risk, and liquidity risk, these are not unique to fixed-income assets. Market risk relates to the volatility of the market as a whole, credit risk involves the possibility of a borrower defaulting, and liquidity risk pertains to the ease of buying or selling an investment. However, inflationary risk directly impacts the real value of the returns generated by fixed-income securities, making it a defining risk factor for these types of investments.