Municipal Inflation-Linked Securities

What Are Municipal Inflation-Linked Securities?

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

Understanding Municipal Inflation-Linked Securities

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

Municipal inflation-linked securities change the assumed amount of principal by binds it to the Consumer Price Index (CPI), an acknowledged measure of the real inflation rate. By fluctuating the assumed principal alongside the CPI, the security safeguards the holder from inflation risk. They additionally don't increase in price on the off chance that the rate of inflation diminishes. Since less investors purchase municipal inflation-linked securities than municipal bonds, they can be difficult to trade, so they are not viewed as especially liquid.

Municipal Inflation-Linked Securities versus Municipal Bonds

Municipal inflation-linked securities are basically the same in many ways to municipal bonds. They are both issued by municipalities to fund-raise for infrastructure projects, like streets, parks, schools and air terminals. 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 changes 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 over the rate of inflation.

During periods of inflation, on the off chance that the inflation rate was greater than the coupon rate, it would be feasible to lose money by investing in a municipal bond, in light of the fact that the interest earned on the bond would be not exactly the value the money was losing through inflation. By binds 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 the means by which municipal inflation-linked securities can safeguard investors from losing money during periods of inflation. Therefore municipal inflation-linked securities offer lower coupon rates than do comparable municipal bonds.

Features

• Municipal inflation-linked securities offer lower coupon rates than do comparable municipal bonds.
• Municipal inflation-linked securities are investment vehicles, issued by neighborhood municipalities, where the variable coupon payment is indexed to the inflation rate, as measured by the CPI.
• Municipal inflation-linked securities safeguard the holder from inflation risk by differing the assumed principal alongside the CPI.