Which of the following statements represents a problem associated with fully inflation-indexed securities?
A) During periods of inflation, much of the interest payments represent real increases in purchasing power.
B) The government will tax only the inflation-adjusted payments.
C) After-tax returns to bondholders will be adversely affected by price changes.
D) The interest payments will be taxed by the government thereby reducing the return to bondholders.

Question

Quizplus · Accepted Answer

Fully inflation-indexed securities provide interest payments that are adjusted for inflation, which means that the interest income is taxed as income rather than capital gains. This can result in a reduction in after-tax returns to bondholders as they are subject to income tax.

Which of the Following Statements Represents a Problem Associated with Fully