Chapter 16: Problem 6

Why might a person purchase an inflation indexed Treasury bond?

Short Answer

Expert verified

A person might purchase an inflation-indexed Treasury bond to hedge against inflation. The principal of these bonds is adjusted to account for inflation, thereby preserving the buyer's purchasing power even in an inflationary environment.

Step by step solution

Understand the Concept of Inflation-Indexed Treasury Bonds

Inflation-indexed bonds are a type of Treasury security issued by the U.S. government. The principal of these bonds is adjusted according to the inflation rate. When inflation rates rise, the value of these bonds increases.

Explain the Purpose of Inflation-Indexed Treasury Bonds

The main purpose of purchasing inflation-indexed bonds is to protect against inflation risk. Since the principal increases with inflation, the interest payments (which are a fixed percentage of the principal) also increase. This way, an investor's purchasing power is maintained even when inflation is high.

Understand Why a Person Might Purchase these Bonds

A person might purchase an inflation-indexed Treasury bond as a way to safeguard their investment against the eroding effects of inflation. In other words, it's a way to ensure the value of their money doesn't decrease over time due to rising prices. It’s particularly appealing to long-term investors who want to preserve their purchasing power over the years.

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Why might a person purchase an inflation indexed Treasury bond?

Short Answer

Step by step solution

Understand the Concept of Inflation-Indexed Treasury Bonds

Explain the Purpose of Inflation-Indexed Treasury Bonds

Understand Why a Person Might Purchase these Bonds

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