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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."

The principal of an inflation-adjusted bond is always guaranteed to its investor.

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True

False

False. The principal of an inflation-adjusted bond is guaranteed by the full faith and credit of the US government if an investor holds onto it until its maturity.

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.

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.

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