Income Intermediate: Treasury Inflation-Adjusted Securities

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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.

Par value measures the effects of inflation.

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True

False

False. The CPI-U measures the effects 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.

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.

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.

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