How are TIPS adjusted for inflation?
A) the interest rate is adjusted for inflation during each period
B) the principal is adjusted once the bond reaches maturity
C) the principal is adjusted for inflation each period
D) the interest rate is adjusted once the bond reaches maturity

Question

Quizplus · Accepted Answer

TIPS (Treasury Inflation-Protected Securities) have their principal adjusted for inflation each period based on the Consumer Price Index (CPI). This ensures that the investor receives an inflation-adjusted return at maturity. The interest rate on TIPS, however, remains fixed, but since it is applied to the increased principal, the interest payment also increases with inflation. Therefore, option C is the correct answer.

How Are TIPS Adjusted for Inflation