Corporate
Notes
Corporations
and Government Sponsored Enterprises issue inflation-linked structures
as part of their overall funding program. The notes are typically
issued with a “floating coupon” structure based on the
change in the Consumer Price Index for All Urban Consumers1
(CPI) over the previous year. The inflation component is added to
the fixed rate coupon and paid to the investor. At maturity, the
initial investment is returned to the investor without any inflation
adjustment. Therefore, a portion of each interest payment is meant
to offset inflation, and the remainder is the real return.
Inflation-linked
corporate notes allow investors to further diversify their portfolio
holdings with an investment that has an increased spread over Treasury
securities.
Estate
Feature
Many inflation-linked
corporate notes provide investors with an estate feature that is
commonly referred to as a survivor’s option. This provision
is designed to protect estate assets and provides for the full withdrawal
of the principal and interest in the event of death of adjudication
of incompetence of the beneficial owner, regardless of whether the
current market value has fallen. It is important to note that very
few fixed-income investments offer this attractive feature.
1 Additional
information about the Consumer Price Index can be found at www.bls.gov
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