What is a common risk associated with POBs?

The correct choice highlights a significant risk associated with Pension Obligation Bonds (POBs), which is that the invested proceeds may not generate enough returns to cover the interest owed on the bonds.

POBs are issued by municipalities to fund pension liabilities, and the idea is to invest the funds in a way that earns a higher return than the interest rate on the bonds. However, there is always a risk that the investments could underperform, and if this happens, the municipality could find itself in a worse financial situation than before. If the returns from the investments fall short of the interest payments, the issuer may struggle to meet its obligations without resorting to additional borrowing or cuts in services.

The other options present misconceptions about the nature of POBs. While high returns from proceeds might be an attractive outcome, assuming they will always yield positive results overlooks the associated investment risks. The simplicity of managing POBs does not reflect the complexities and challenges they pose, particularly in regard to market volatility and investment performance. Lastly, the idea that there are no risks if managed well is misleading. All financial instruments carry inherent risks, and successful management requires careful risk assessment and strategic investment decisions.