Table of Contents
Treasury Inflation-Protected Securities (TIPS) are a type of U.S. government bond designed to help investors protect against inflation. They are considered a low-risk investment option and are popular among those seeking to preserve purchasing power over time.
What Are TIPS?
TIPS are bonds issued by the U.S. Department of the Treasury. The principal value of TIPS adjusts with changes in the Consumer Price Index (CPI), which measures inflation. As inflation rises, the principal increases; when deflation occurs, the principal decreases but will not fall below the original amount.
How Do TIPS Work?
Investors receive interest payments twice a year. The interest rate is fixed at issuance, but because it is applied to the adjusted principal, the actual interest payments fluctuate with inflation. At maturity, investors receive the adjusted principal or the original amount, whichever is higher.
Benefits of Investing in TIPS
- Inflation protection: The principal adjusts with inflation, maintaining purchasing power.
- Low risk: Backed by the U.S. government, they are considered very safe.
- Tax advantages: The interest income is exempt from state and local taxes.
- Diversification: They can diversify an investment portfolio.