If the US dollar loses 10% of its value to inflation, how much will the Treasury inflation-protected securities return?


I know that when there is too much of something the value of that item goes down. If the money supply of US Dollars goes up drastically that will that lead to or cause inflation of the US dollar or a decrease in its value. According to an article I am referencing *," When inflation starts to bubble up, Treasury inflation-protected securities can turn down the heat on your portfolio. Issued with the full faith and credit of the U.S. government, TIPS are one of the few investments guaranteed to earn, under normal circumstances, a "real," or after-inflation, return. Their principal value adjusts in sync with the consumer price index and, because the coupon payments on TIPS cue off this adjusted principal figure, the bonds pay an inflation-indexed income, too."
So my question is: if the US dollar loses 10 % of its value to inflation, how much will the bonds return? In dollar amounts- a $5000 investment in Treasury inflation-protected securities should yield how much?


Suppose that $5000 is the face value or redemption value (not the market price at which an investor may have bought it) of a 5-year TIPs. Suppose that it promises to pay an annual coupon payment of 1% or the amount of $50 at the time of purchase. Now assume that the inflation rate is 10% in the course of the year in question. The Treasury adjusts upwards the face or redemption value of $5000 by 10%, to $5500. Then it pays an annual coupon amount of 1% of $5500 or $55. Thus annual coupon payments are calculated on the inflation adjusted face value. If there is deflation, say -10%, the face value is adjusted downwards to $4500 and the coupon payment is calculated as 1% of $4500 or $45. At maturity, the amount paid out is likewise adjusted upwards for inflation. Thus if the inflation rate is 10% for the entire 5 year period, the redemption amount is $5500 at the end of 5 years. There is however NO downward adjustment in case of deflation over this 5 year period, according to the Treasury’s website. Instead the face value of $5000 promised during purchase is paid.

Last updated on
October 20, 2023

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