Inflation-indexed bonds give both individual and institutional investors a chance to buy a security that keeps pace with inflation.
When you buy Inflation-Indexed securities, the U.S. Treasury pays you interest on the inflation-adjusted principal amount. Competitive bidding before the security's issue determines the fixed interest or coupon rate. At maturity, the Treasury redeems your securities at their inflation-adjusted principal or par amount, whichever is greater. It issues Inflation-Indexed securities through Public Debt's TreasuryDirect system and through TRADES -- the commercial book-entry system where financial institutions or government securities brokers/dealers hold the securities on your behalf.
The securities values are periodically adjusted for inflation, and the principal you receive when they mature won't drop below the par amount at which they were originally issued. Like other Treasury securities, they're safe -- backed by the full faith and credit of the U.S. government. And, you get a tax break. Inflation-Indexed securities are exempt from state and local taxes, although federal income taxes apply.