Investments Without Purchasing Power Risk: Safe Bets

U.S. Treasury Inflation-Protected Securities (TIPS) are an investment that does not have purchasing power risk. TIPS are government bonds issued by the U.S. Treasury that are designed to protect investors against inflation. Unlike traditional fixed-income securities, the principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), which measures inflation. This adjustment ensures that the purchasing power of the investment is maintained over time.

U.S. Treasury Inflation-Protected Securities (TIPS)

TIPS are a type of Treasury security that is indexed to inflation. This means that the principal value of the security is adjusted periodically based on changes in the CPI. The CPI is a measure of the average change in prices over time in a basket of goods and services. By indexing the principal value of TIPS to the CPI, the U.S. Treasury ensures that the purchasing power of the investment is maintained over time.

TIPS are designed to protect investors against the negative effects of inflation. Inflation can erode the purchasing power of an investment over time, as the same amount of money will buy fewer goods and services. By adjusting the principal value of TIPS based on changes in the CPI, the U.S. Treasury ensures that the investment keeps pace with inflation. This means that investors in TIPS are protected against the erosion of their purchasing power.

TIPS are a relatively low-risk investment option, as the U.S. Treasury guarantees the principal value and interest payments. However, it's important to note that TIPS are not completely risk-free. There is always the risk that the U.S. Treasury could default on its obligations, although this risk is very low. Additionally, TIPS are subject to interest rate risk, which means that their market value can fluctuate with changes in interest rates.

Overall, U.S. Treasury Inflation-Protected Securities (TIPS) are a good option for investors seeking to protect their purchasing power. By adjusting the principal value based on changes in the CPI, TIPS provide a hedge against inflation. While TIPS are not completely risk-free, they offer a relatively low-risk way to maintain the purchasing power of an investment over time.

STRIPS

U.S. Treasury Inflation-Protected Securities (TIPS) are an investment that does not have purchasing power risk. TIPS are government bonds issued by the U.S. Treasury that are designed to protect investors against inflation. The principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), which measures inflation. This adjustment ensures that the purchasing power of the investment is maintained over time. As inflation rises, the principal value of TIPS increases, providing investors with protection against the erosion of purchasing power. Therefore, TIPS can be considered an investment with minimal purchasing power risk compared to other investments that are not specifically designed to combat inflation.

Treasury STRIPS are suitable investments for individuals seeking current income. STRIPS are zero-coupon bonds that are purchased at a deep discount and held to maturity to fund future retirement liabilities. There is little credit risk because the U.S. Treasury is a top credit. However, there is no current income as they don't pay until maturity. STRIPS have a large amount of purchasing power risk as a long-term zero-coupon obligation, but this is not an issue if they are held to maturity.

Retirement plan managers like STRIPS because they don't have to worry about reinvestment risk. STRIPS can be "tucked away" for 20 or 30 years with no further work or worry on the part of the retirement fund manager. Pension funds and retirement accounts are the large purchasers of STRIPS.

Treasury STRIPS are not suitable investments for retirement accounts as the holder is subject to default risk.

Zero-coupon bonds

Treasury STRIPS are another type of zero-coupon bond that is purchased by pension funds and retirement accounts. These are suitable investments for individuals seeking current income. As with other zero-coupon bonds, there is little credit risk because the US Treasury is a top credit.

Overall, zero-coupon bonds can be a good investment for those seeking current income and for retirement plan managers. However, it is important to consider the default risk associated with these investments.

Retirement accounts

Treasury STRIPS are popular with retirement plan managers because they don't have to worry about reinvestment risk. There are no semi-annual interest payments to reinvest, so they can be "tucked away" for 20 or 30 years with no further work or worry on the part of the retirement fund manager.

Another investment that does not have purchasing power risk is U.S. Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds issued by the U.S. Treasury that are designed to protect investors against inflation. The principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), which measures inflation. This adjustment ensures that the purchasing power of the investment is maintained over time.

Pension funds

One example of a pension fund is Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities). These are zero-coupon bonds, which means they are purchased at a deep discount and are held to maturity. There is little credit risk because the US Treasury is a top credit. However, there is no current income as they do not pay until maturity.

Treasury STRIPS have a large amount of purchasing power risk as a long-term zero-coupon obligation. Nevertheless, this is not an issue if they are held to maturity. This makes them suitable for retirement plan managers who do not have to worry about reinvestment risk.

Another example of a pension fund with minimal purchasing power risk is U.S. Treasury Inflation-Protected Securities (TIPS). These are government bonds issued by the U.S. Treasury that are designed to protect investors against inflation. The principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), which measures inflation. This ensures that the purchasing power of the investment is maintained over time.

Frequently asked questions