SIE practice questionhardAccount Types: TIPS and Inflation Protection
A client’s account holds Treasury Inflation-Protected Securities (TIPS). What feature makes TIPS unique?
- AThey have the highest yield among Treasuries.
- BInterest is paid only at maturity.
- CPrincipal is adjusted for inflation based on changes in the CPI.✓ Correct answer
- DThey are not taxable at any level.
Explanation
Why C — Principal is adjusted for inflation based on changes in the CPI.
TIPS adjust principal based on changes in the Consumer Price Index. Interest is paid semiannually on the adjusted principal. TIPS are federally taxable and generally have lower stated yields than comparable nominal Treasuries because of the inflation adjustment.
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