For Treasury Inflation-Protected Securities, the real rate of return is equal to which of the following?

• A. The coupon rate
• B. The inflation rate
• C. The nominal yield
• D. The prime rate

Answer: (A)

In TIPS, the real rate of return is the fixed coupon rate because the coupon is paid on the inflation-adjusted principal. As inflation raises the principal, the periodic interest payments rise accordingly, so the portion of return that preserves purchasing power stays at the fixed coupon rate. For example, with a 2% coupon, you get payments based on the inflated principal, ensuring the real yield stays around 2% despite inflation. The inflation rate itself isn’t the return you earn, and the nominal yield would include inflation, not just the real rate. The prime rate is unrelated to TIPS.