Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if ________.
A) inflation is lower than anticipated over the investment period
B) inflation is higher than anticipated over the investment period
C) the U.S. dollar increases in value against the euro
D) the spread between commercial paper and Treasury securities remains low

Question

Quizplus · Accepted Answer

TIPS (Treasury Inflation-Protected Securities) offer investors higher rates of return when inflation is higher than anticipated over the investment period, as the principal and interest payments are adjusted for inflation. When inflation is lower than anticipated or deflation occurs, the returns on TIPS may be lower than on equivalent standard bonds. The other options (A, C, and D) do not directly impact the returns on TIPS.

Investors Will Earn Higher Rates of Returns on TIPS Than