There are many
types of inflation-linked investment options for individual investors
IFCDs and Corporate Notes have
a “floating coupon” structure whereby the inflation
component is added to the fixed rate coupon and paid out to the
investor. At maturity, the initial investment is returned to the
investor without any inflation adjustment. Therefore, a portion
of each interest payment is meant to offset inflation, and the remainder
is the real return.
and TIPS have an “adjusted principal”
structure and provide inflation-linked returns by increasing the
base amount of the investment to keep pace with changes in CPI,
and pay a semi-annual coupon interest as a percentage of that adjusted
base. At maturity, the inflation adjustment that has been accumulating
during the holding period is paid out along with the original investment
amount. This ensures that the money you get back at maturity will
have the same “buying power” that your initial investment
did when you bought the CDIPs or TIPS. With the effects of inflation
neatly taken care of in this matter, it’s easy to see that
the coupon payments received represent the real return on the investment.
are an accrual-type security and can be redeemed any time after
a 12-month minimum holding period. They increase in value monthly
and the interest is paid when the bond is redeemed.