Municipal Inflation-Linked Securities

See: TIPS.

You buy a muni bond that's yielding 3%, net. Meaning no taxes from the Feds or the State. But it's of long duration. This issue, coming from Park City, Utah for other Utahians, isn't payable for 20 years. That is, it'll pay 3% interest for 20 years, twice a year, and then pay back the principal 20 years from now.

But you're worried that inflation will make the $25,000 you want to invest "feel like" it's only worth $10,000 by the time they pay it back. So they offer an inflation adjustment feature, wherein a number is agreed upon before the issue as being the authority on inflation, i.e., what the actual number was. Usually, that's a Federal number, and it might not directly correlate to what's going on in Park City...but at least it's a start, and hopefully close.

So that indenture might proffer that the eventual principal payout will fluxuate with inflation, such that its notional amount is $25,000, but it may go up...and it may go down, should we have decades of deflation. But that eventual principal return, in this type of bond, will be some adjusted number, so that in today's dollars, it's returning $25,000 at the end. No more, no less...at least, as driven by inflation.