Question

Treasury Inflation-Protected Securities (TIPS) pay a fixed interest rate for life.

a. pay a variable interest rate that is indexed to inflation but maintain a constant principal.
b. provide a constant stream of income in real (inflation-adjusted) dollars.
c. have their principal adjusted in proportion to the Consumer Price Index.
d. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

Answer 1

d

Step-by-step explanation:

Option d is correct, i.e. Treasury Inflation-Protected Securities (TIPS) provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

This is true because TIPS adjust's the principle of the bond with inflation and even though the interest rate is fixed , the interest is calculated on the adjusted principle thereby increasing the interest payment during inflation