Question

Dwight is considering investing in Treasury Inflation-Protected Securities or in the stock market. What is a unique feature of Treasury Inflation-Protected Securities that might make him want to choose securities overstocks?

A.The amount earned in principle corresponds with the level of deflation.

B.It has a 30-year maturity date, so it has more time to grow in value.

C.It matures within a few weeks, so Dwight can get his money fast.

D.The investment income is automatically invested in other bonds before its maturity date.

Answer 1

The interest rates for treasury notes are greater than for T-bills because of the longer maturity dates.

True

Answer 2

Option B - It has a 30-year maturity date, so it has more time to grow in value is the unique feature in Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities:

• A Treasury bond called a Treasury Inflation-Protected Security (TIPS) is indexed to an inflationary gauge to shield investors from the loss of their money's buying power.
• While the interest payment fluctuates with the bond's adjusted principle value, TIPS' principal value increases as inflation does.
• Investors' principal is safeguarded because they will never receive less than what they invested.
• TIPS' main value increases in line with inflation.
• According to the Consumer Price Index, inflation is the rate of price growth across the whole U.S. economy (CPI).
• When there isn't a corresponding increase in real wage growth to counteract the consequences of rising prices, inflation becomes a problem.
• Because TIPS pay interest every six months based on a fixed rate established at the bond's auction, they are a popular asset for both securing portfolios from inflation and benefitting from it.
• The rate is applied to the bond's adjusted principle or value, thus the amount of interest payments may differ.
• Because the U.S. government backs TIPS, which have maturities of five, ten, and thirty years, they are regarded as low-risk investments.
• TIPs return the greater of the adjusted principal or the original principle at maturity.

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