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If you earn interest on an inflation-adjusted bond, _______.

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The income is tax-deferred

The income is taxed as ordinary income by the IRS

You only have to pay tax on coupon interest, not principal interest

The income is taxed as ordinary income by the IRS. If you earn interest on an inflation-adjusted bond, the income is taxed as ordinary income by the IRS.

Issuing inflation-adjusted securities reduces the interest costs of the US Treasury department.

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True

False

True. The Treasury department saves on interest costs in this way.

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.

The process of selling a bond's coupons and principal separately is called stripping.

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True

False

True. Stripping involves separating the two from each other.

Inflation is the continuous rise of prices over time.

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True

False

True. When we speak of the rising of prices, we call it "inflation."

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