CHARACTERISTICS OF INFLATION-ADJUSTED SECURITIES

What happens to an inflation-adjusted bond if the economy experiences decreased prices over time?  If there is deflation, the bond's principal will decline, but not below its par value.  Remember that when the bond matures, you are guaranteed to receive either its inflation-adjusted principal or its original principal, whichever is higher.

Treasury inflation-adjusted securities are issued in denominations and multiples of $1,000.  So far, the Treasury has issued inflation-adjusted securities with maturities of only five or ten years, but will be adding thirty-year maturities in the future.  Like other Treasury bonds, new inflation-adjusted bond issues are sold by auction through the Treasury Direct program on a quarterly basis.  There is no certificate issued when you buy one of these bonds from the U.S. Treasury.  The Treasury issues and maintains the bonds at their par value in bank accounts through accounting entries or electronic records.

Treasury inflation-adjusted securities will soon be eligible to participate in the separate trading of registered interest and principal of securities (STRIPS) program.  Through this program, the bond investor "strips" the coupon interest payments from the bond and sells them, leaving the principal of the bond to be sold at a discounted price.

Why do investors buy inflation-adjusted bonds instead of straight bonds?