Deflation provide, really, because, protection

Zesty

The 2007AM Exam mentioned that TIPS provide both inflation and deflation protection. Is this really true--if so, how?

Also, since we know inflation hurts nominal bond investors, can we say that deflation is good for them because it increases the value of their bonds?

NakedPuts2011

TIPS guarantee you get at least principal back @ maturity, so they kind of protect from deflation, although worst case scenario you could receive nothing back but your investment (which during deflation is still good compared to other investments)

Deflation is great for fixed rate bonds. You are earning 5% on some long term treasury while everyone else is losing with negative nominal rates.



Edited 1 time(s). Last edit at Thursday, May 26, 2011 at 10:18PM by markCFAIL.

Analyze_This

You invest $1000 today.

10 years later price levels are down 50% and have decreased every year. You get your $1000 back, it is worth more 10 years from now than it was today.

NO EXCUSES

lcw77

TIPS has coupon and principal.

Its principal is inflation and deflation protected.
Its coupon is not deflation protected.

An example on V3, P243.