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A bond's principal will lose its purchasing power over time unless it is adjusted for inflation.

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True

False

True. That is why some bonds adjust their interest rates to stay ahead of inflation.

Phantom income is taxable income on an inflation-adjusted bond's coupon interest.

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True

False

False. Phantom income refers to taxable income on an inflation-adjusted bond's principal interest.

The main advantage of inflation-adjusted securities is _______.

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They will help you reduce your taxes

They offer an investment that maintains its purchasing power

They are not affected by interest rates

They offer an investment that maintains its purchasing power. They manage this by paying interest rates that stay ahead of inflation.

In periods of deflation, inflation-adjusted securities will increase in value.

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True

False

False. In periods of deflation, inflation-adjusted securities will decrease in value, but not below their par values.

Par value measures the effects of inflation.

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True

False

False. The CPI-U measures the effects of inflation.

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