Income Intermediate: Treasury Inflation-Adjusted Securities

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The time when a bond pays you back your principal is called its _______.

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Par value

Maturity

CPI-U

Maturity. The maturity is the date on which you get your principal back.

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.

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.

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.

Only the principal of an inflation-adjusted bond is adjusted for inflation.

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True

False

False. Semi-annual interest payments (not the interest rate) will also adjust for inflation as the principal adjusts.

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