Question

Purchasing a TIPS Bond will protect the purchaser against inflation by increasing the bond's coupon rate as inflation increases.

Select one:

True

False

Answer 1

The answer is False.

Reason -

• The principal value of TIPS rises when inflation rises rather than interest rates.
• TIPS pay fixed rate of interest which is pre decided in auction of bond.
• But the principal amount is adjusted based on market inflation.
• If the principal amount is adjusted higher over time due to rising prices, the interest rate will be multiplied by the increased principal amount.
• As a result, investors receive higher interest or coupon payments as inflation rises.

Hope you understand the solution.