SIE Exam Question 989: Answer and Explanation

Question: 989

Which of the following is correct regarding TIPS?

• A. Investors are paid either the adjusted principal amount at maturity, or the original principal amount, whichever is greater.
• B. They pay interest annually.
• C. The payments increase with inflation but never decrease.
• D. They have a final maturity up to 10 years from the date of issue.

Correct Answer: A

Explanation:

With TIPS (treasury inflation-protected securities), investors are paid either the adjusted principal amount at maturity, or the original principal amount, whichever is greater. TIPS pay interest every six months, and their interest payments increase with inflation and decrease with deflation. They have maturities of 5, 10, or 30 years.