Investors will earn higher rates of returns on TIPS than equivalent default risk standard bonds if _______________.
A) inflation is lower than anticipated over the investment period
B) inflation is higher than anticipated over the investment period
C) the U.S. dollar increases in value against the euro
D) the spread between commercial paper and Treasury securities remains low

Question

Quizplus · Accepted Answer

TIPS (Treasury Inflation-Protected Securities) are indexed to inflation, so their real value increases with inflation. Therefore, in a scenario where inflation is higher than anticipated over the investment period, TIPS investors will earn higher rates of return than those investing in standard bonds with equivalent default risk.

Investors Will Earn Higher Rates of Returns on TIPS Than