TIPS offer investors inflation protection by ________ by the inflation rate each year.

Question

Quizplus · Accepted Answer

TIPS (Treasury Inflation Protected Securities) offer investors inflation protection by both increasing the par value and the coupon payment by the inflation rate each year. This ensures that the investor's return keeps pace with inflation, as the value of the security increases along with the inflation rate. Option A is incorrect because increasing only the coupon rate would result in an increase in nominal yield, but the real yield (adjusted for inflation) would still be the same. Option B is incorrect because increasing only the par value would not affect the coupon payment or the yield to maturity, and the investor's return would still be eroded by inflation. Option D is incorrect because the promised yield to maturity is a fixed rate at the time of issuance, and does not change with inflation.

TIPS Offer Investors Inflation Protection by ________ by the Inflation