Inflation-Linked Investment Options

There are many types of inflation-linked investment options for individual investors to consider:

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.

CDIPs 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.

I-Bonds 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.

This site is not intended to take the place of professional advice. 2008© Incapital.
All rights reserved.