Business and Personal Finance Dictionary

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• INFLATION-INDEXED SECURITY
  
  Bonds and notes that promise your return will be higher than the rate of inflation if you hold them until maturity are known as inflation-indexed securities. Mutual funds that invest in these bonds and notes are described as inflation-indexed funds. For example, inflation-indexed Treasury notes pay a fixed interest rate but offset the effects of inflation by adjusting your principal periodically, based on the Consumer Price Index for all Urban Consumers (CPI-U). If you buy a $1,000 inflation-indexed Treasury, the interest will be calculated and paid twice a year on the inflation-adjusted principal, which will increase over time. You owe federal income tax on these inflation adjustments each year, as well as on the interest, even though you don't receive the increases until the security matures. These securities also provide a safeguard against deflation since they guarantee that you'll get back no less than par, or face value, at maturity.
  
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