Municipal Inflation-Linked Securities

Municipal Inflation-Linked Securities

Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payments is indexed to the inflation rate, as measured by the Consumer Price Index (CPI). During periods of inflation, if the inflation rate was greater than the coupon rate, it would be possible to lose money by investing in a municipal bond, because the interest earned on the bond would be less than the value the money was losing through inflation. The big difference between the two is that a municipal bond pays one coupon rate for the duration of the bond until maturity, while a municipal inflation-linked security adjusts the assumed principal to keep track with inflation. Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payments is indexed to the inflation rate, as measured by the Consumer Price Index (CPI). Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payment is indexed to the inflation rate, as measured by the CPI.

Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payment is indexed to the inflation rate, as measured by the CPI.

What Are Municipal Inflation-Linked Securities?

Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payments is indexed to the inflation rate, as measured by the Consumer Price Index (CPI).

Municipal inflation-linked securities are investment vehicles, issued by local municipalities, where the variable coupon payment is indexed to the inflation rate, as measured by the CPI.
Municipal inflation-linked securities protect the holder from inflation risk by varying the assumed principal along with the CPI.
Municipal inflation-linked securities offer lower coupon rates than do comparable municipal bonds.

Understanding Municipal Inflation-Linked Securities

Municipal inflation-linked securities are securities similar to municipal bonds which are sold to investors. They are purchased with a principal investment and they pay a steady coupon rate, or interest rate, on that principal. They have a specific maturity date, and are used to raise money for some sort of municipal improvement or infrastructure project.

Municipal inflation-linked securities vary the assumed amount of principal by tying it to the Consumer Price Index (CPI), an accepted measure of the actual inflation rate. By varying the assumed principal along with the CPI, the security protects the holder from inflation risk. They also do not increase in price if the rate of inflation decreases. Because fewer investors purchase municipal inflation-linked securities than municipal bonds, they can be hard to trade, so they are not considered particularly liquid.

Municipal Inflation-Linked Securities vs. Municipal Bonds

Municipal inflation-linked securities are very similar in most ways to municipal bonds. They are both issued by municipalities to raise money for infrastructure projects, such as roads, parks, schools and airports. They are both structured the same way, with a principal amount that the investor pays, and a coupon rate that the municipality pays the holder in interest for holding the security.

The big difference between the two is that a municipal bond pays one coupon rate for the duration of the bond until maturity, while a municipal inflation-linked security adjusts the assumed principal to keep track with inflation. By adjusting the principal for inflation, when the coupon rate is calculated, that payment is adjusted for inflation, too. This keeps the rate of a municipal inflation-linked security paying out above the rate of inflation.

During periods of inflation, if the inflation rate was greater than the coupon rate, it would be possible to lose money by investing in a municipal bond, because the interest earned on the bond would be less than the value the money was losing through inflation. By tying it to the CPI and adjusting the amount of principal to the inflation rate, the coupon rate is accrued on top of inflation. This is how municipal inflation-linked securities can protect investors from losing money during periods of inflation. This is also why municipal inflation-linked securities offer lower coupon rates than do comparable municipal bonds.

Related terms:

Bond : Understanding What a Bond Is

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. read more

Corporate Inflation-Linked Securities (CILS)

Corporate inflation-linked securities mitigate inflation risk by indexing the coupon rate to an inflationary gauge such as the consumer price index. read more

Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services. read more

Coupon

A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value, also referred to as the "coupon rate." read more

Dollar Bond Index-Linked Securities (Dollar BILS)

Dollar bond index-linked securities are zero-coupon bonds that pay interest at maturity based on the underlying performance of a specific index. read more

Inflation-Indexed Security

An inflation-indexed security is a security that guarantees a return higher than the rate of inflation if it is held to maturity. Inflation-indexed securities link their capital appreciation, or coupon payments, to inflation rates. read more

Inflation

Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Security (TIPS) is a bond that offsets the effects of rising prices by adjusting its principal value as inflation rises. read more