Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury bonds that are indexed to inflation. Their principal value adjusts based on changes in the Consumer Price Index (CPI), providing investors with protection against inflation.
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TIPS pay interest every six months at a fixed rate, but the interest payments increase with inflation.
The principal amount of TIPS increases with inflation and decreases with deflation, ensuring the real value is maintained.
At maturity, investors receive either the adjusted principal or the original principal, whichever is greater.
TIPS are considered low-risk investments as they are backed by the U.S. government.
Investors can purchase TIPS directly from the U.S. Treasury or through secondary markets.
Review Questions
How does inflation affect the principal and interest payments of TIPS?
What happens to the principal of TIPS if there is deflation?
Why are TIPS considered low-risk investments?
Related terms
Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, used as an indicator of inflation.
Treasury Bonds: Long-term debt securities issued by the U.S. government that have maturities greater than ten years.
Inflation: The rate at which the general level of prices for goods and services is rising, eroding purchasing power.
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