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Protecting Your Money With Inflation Adjusted Bonds
What are inflation adjusted bonds, and how can they help investors protect their money? Inflation adjusted bonds are also called inflation protected bonds, and they are a great way for investors to protect their investment capital while planning for inflation in the future. These bonds offer a guaranteed hedge against the inflation rate rising in the future before the bond matures. There are several different types of inflation protected bonds, including some offered by the federal government of the United States, which are called Treasury Inflation Protected Securities, or TIPS for short. The federal government is not the only one who offers inflation adjusted bonds though. Many corporations and other entities may also offer them.
How do inflation adjustable bonds work, and how do they protect the money from investors? With bonds that are not protected against inflation, the face value of the bond may be less at maturity than it was when the bond was issued, because inflation has occurred. Inflation protected bonds take interest into consideration, so that the interest payments and value of the bond reflect the activity of the interest rate. With Treasury Inflation Protected Securities, the principal value of the bond is adjusted every six months, to take interest rates into consideration for the total value of the bond. The consumer price index is used to adjust the amount of the bond, and if interest goes up so does the value of the bond. These bonds from the federal government are considered a very low risk investment, because the federal government has never defaulted on debt, and the risk of it happening is almost zero. As soon as the financial crisis started, investors started buying these bonds in large amounts, from both the US government and from corporations and private entities.
Many investors are conservative, with the intent of holding onto their investment principal and not investing in high risk ventures. Inflation adjusted bonds is a way for investors to put their capital into a very low risk venture and preserve the money, instead of losing it on an investment that is not safe. An inflation protected bond is perfect for a retirement investment portfolio. as well as for investments that are long term and will mature in years, when inflation may be much higher. Buying bonds which are adjusted for and protected from the rate of inflation allows investors to make sure that their investment capital is not worth less in the future than it was when the bond was purchased. These bonds are also great investments for future college and school savings.
Inflation adjusted bonds allow investors to protect their investment from a value loss simply because the inflation rates have gone up. This does not mean that inflation protected bonds are a guaranteed sure thing, because bonds are based on debt, and if the bond issuer can not pay the interest or premium payments than the investor will loss money. With government issued inflation adjustable bonds, the chance of the bond issuer defaulting is so small it is almost non-existent. With private entities though, this is not always the case. The financial crisis has caused companies that were well known with a solid history to fold, and any bonds issued by these companies may not be paid. There are risks involved in inflation protected securities, and these risks will vary depending on the bond and the bond issuer, but they can be a great way to preserve money while protecting the investment against losing value simply because the inflation rate rises.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Bond Investment22 Dec 2008|