inflation-indexed security

Inflation-Indexed Securities

A bond or other fixed-rate security with an interest rate that varies according to inflation. An inflation-indexed bond, for example, may pay a fixed coupon plus an additional coupon with the amount adjusted every so often according to some inflation indicator, such as the Consumer Price Index. If these securities are held to maturity, then the investor guarantees that the return will exceed the rate of inflation. Inflation-indexed securities exist to provide a low-risk investment vehicle in which the return is guaranteed not to fall below the rate of inflation. See also: I Bond.

inflation-indexed security

A security with a rate of return linked to some specified measure of inflation. For example, Series I U.S. savings bonds pay holders a specified fixed rate adjusted for changes in the consumer price index.
References in periodicals archive ?
5-Year Treasury Inflation-Indexed Security, Constant Maturity.
The value of an inflation-indexed security (such as TIPS) tends to decrease when real interest rates increase, and increase when real interest rates decrease.
However, a large share of TIPS activity occurs via "breakeven inflation" trades, whereby a particular inflation-indexed security is traded against a proportionate quantity of a particular nominal security.
5 percent, but there is an inflation risk associated with holding this bond that does not exist with an inflation-indexed security such as TIPS.
Shen and Corning used a ten-year average inflation rate, and in their analysis, the maturity of the conventional Treasury security not always matched the maturity of the inflation-indexed security.
that is, the expected rate of inflation at which the two securities trade at the same price--can be approximated by the difference in the yields to maturity between a nominal and an inflation-indexed security.
An important real rate, which is thought to have a particular influence on investment spending, takes a common callable bond, the 30-year GNMA, and subtracts, as an inflation estimate, the yield difference between a 10-year Treasury bond and a 10-year Treasury inflation-indexed security.
Example 1: A $100,000 face value inflation-indexed security issued at par in January 2001 bears 5% interest and matures in four years.
This paper compares efficient portfolios containing an inflation-indexed security to portfolios without such a security.
Because the payments automatically adjust to compensate for inflation, the yield on an inflation-indexed security reflects the real rate of return that would be realized over the maturity of the security.
A final consideration in valuing TIIS is that the securities offer deflation protection, in the sense that the cumulative adjustment to the principal amount of the inflation-indexed security at maturity cannot be negative.
This section describes the cash flows paid and received by a buy-and-hold investor in an inflation-indexed security.