Final answer:
The statement that the principal of a Treasury inflation-protected security is tied to the Producer Price Index (PPI) is false. Option b
Step-by-step explanation:
The statement that the principal of a Treasury inflation-protected security is tied to the Producer Price Index (PPI) is false. The principal of these securities, known as Treasury Inflation-Protected Securities (TIPS), is actually indexed to the Consumer Price Index (CPI), which is a measure of inflation that reflects changes in the cost of living for consumers.
The PPI, on the other hand, measures inflation from the perspective of producers by tracking changes in prices paid for supplies and inputs. While the PPI is an important economic indicator for understanding inflation pressures within the production process, it is the CPI that is used for indexing the principal value of TIPS.
Indexing is a financial mechanism whereby prices, wages, or interest rates are adjusted automatically for inflation, ensuring that the value of the investment maintains its purchasing power over time. In the case of TIPS, as the CPI rises, indicating inflation, the principal amount of the securities is adjusted upwards, which in turn increases the amount of interest paid to investors. Option b