Because of the possibility of disinflation (i.e., price declines), the inflation-adjusted principal at maturity may turn out to be less than ________ value. However, the Treasury has structured TIPS so that they are redeemed at the ________ the inflation-adjusted principal and the initial par value.

Question

Quizplus · Accepted Answer

TIPS are designed to maintain the purchasing power of the principal amount by adjusting it for inflation. However, in the event of deflation, the inflation-adjusted principal at maturity may be less than the initial par value. To address this, the Treasury has structured the redemption of TIPS at the greater of the inflation-adjusted principal and the initial par value. This ensures that investors receive at least the initial par value at maturity, regardless of any potential disinflation.

Because of the Possibility of Disinflation (I