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Types of Bonds

Investment Considerations

Liquidity.

The U.S. Treasury securities market is one of the largest and most liquid securities market in the world, and there is currently an active secondary market for TIPS with over $8 billion traded each day.

Changes to the CPI-U.

While the CPI-U measures changes in the prices for goods and services, movements in the CPI-U that have occurred in the past are not necessarily indicative of changes that may occur in the future.

Three-month lag in Reference CPI-U.

The index ratio which is used to determine the amount of the inflation adjustment to the original principal amount incorporates an approximate three-month lag in the Reference CPI-U that is applicable to any valuation date. Thus, the Reference CPI-U applicable to April in any calendar year is the CPI-U published for January. The three-month lag in the Reference CPI-U for any month may have an impact on the price of the securities in the secondary market, particularly during periods of significant, rapid changes in the CPI-U.

Principal and interest variability.

An investment in securities with principal or interest determined by reference to an inflation index involves factors not associated with an investment in a fixed-principal security. Such factors may include the possibility that the inflation index may be subject to significant changes, that changes in the index may or may not correlate to changes in interest rates generally or with changes in other indexes, that the resulting interest may be greater or less than that payable on other securities of similar maturities and that, in the event of sustained deflation, the amount of the semiannual interest payments and the inflation-adjusted principal amount of the security will decrease. However, if at maturity the inflation-adjusted principal amount is less than a security’s par amount, an additional amount will be paid at maturity so that the additional amount plus the inflation-adjusted principal amount equals the original par amount. Regardless of whether or not such an additional amount is paid, interest payments will always be based on the inflation-adjusted principal as of the interest payment date.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.