SIE practice questionhardTIPS (Treasury Inflation-Protected Securities)
How do Treasury Inflation-Protected Securities (TIPS) provide inflation protection?
- APrincipal is reduced if deflation occurs
- BInterest payments are fixed for the entire term
- CThey pay dividends linked to inflation
- DPrincipal is adjusted based on changes in the Consumer Price Index✓ Correct answer
Explanation
Why D — Principal is adjusted based on changes in the Consumer Price Index
TIPS adjust principal for inflation (CPI). Interest rate is fixed, but paid on adjusted principal. No dividends are paid; principal can decline only under deflation.
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