Inflation-Indexed Security
An inflation-indexed security is a type of bond or investment where the principal and/or interest payments are adjusted based on an inflation index, such as the Consumer Price Index (CPI). These securities are designed to protect investors from inflation by ensuring that their returns keep pace with rising prices. One common example of an inflation-indexed security is the U.S. Treasury Inflation-Protected Security (TIPS), which adjusts its principal value according to inflation rates.
Example
A Treasury Inflation-Protected Security (TIPS) pays interest based on a principal that is adjusted for inflation, ensuring that investors maintain their purchasing power.
Key points
• A bond or security whose principal or interest payments are adjusted for inflation.
• Protects investors from inflation risk by maintaining purchasing power.
• Examples include U.S. Treasury Inflation-Protected Securities (TIPS).
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