Products & Their RisksQuestion 136 of 398
Treasury Inflation-Protected Securities (TIPS) protect investors by:
a.Adjusting the bond's principal value with changes in the Consumer Price Index
b.Guaranteeing a fixed real return regardless of the coupon
c.Paying a coupon that rises with the federal funds rate
d.Converting to common stock if inflation exceeds a threshold
Explanation
With TIPS, the principal is adjusted up or down based on changes in the Consumer Price Index (CPI). The fixed coupon rate is applied to this adjusted principal, so both interest payments and the final principal repayment rise with inflation. This makes TIPS a direct hedge against purchasing-power (inflation) risk.
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