inflation-adjusted principal

Definition

The net worth of a principal amount used to buy inflation-adjusted securities, taking into account any inflation that takes place till the maturity date. The new value of the principal is derived by multiplying the original principal amount by the inflation index ratio.

P(adj) = P(ori) x ( CPI(cur) / CPI(ref) )

Where, P(adj) = the net worth of the principal value after inflation adjustment; P(ori) = the original amount of principal used to buy the security ; CPI(ref) = the inflation level at the time the bond is first issued (usually taken from 3 months before the bond is issued) ; CPI(cur) = the inflation level at the current period of the bond maturity

For example, an investor buys a $2,000 Treasury inflation-adjusted bond in June.

The CPI reference rate is taken from March's CPI (three months earlier), which is, for example, 100. Six months later, inflation has risen 1% and the current CPI is now 101. This will yield an inflation index ratio of 101/100, or 1.01. At the end of six months, the bond's adjusted principal is now worth $2,020, or 2,000 x 1.01.

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You should try and follow the inflation-adjusted principal so that you know that everything was done correctly at that itme.

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The inflation-adjusted principal was a good one to follow because it made sense out of things for us and allowed us more range.

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The inflation-adjusted principal was the best metric to use as the inflation has increased at an accelerating rate in our economy recently.

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