TIPS

TIPS

See: Treasury inflation-proteced securities

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Tip

1. Information on a security, company, or anything else provided by one investor or trader to another that is not available to the general public, that can produce significant profits if it proves to be accurate. See also: Inside information.

2. See: Gratuity.

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Treasury Inflation-Protected Security

A U.S. Treasury security that protects the bondholder from inflation. Most Treasury securities, like most fixed dollar obligations, pay a fixed coupon rate periodically and mature at par. While this carries low risk, it exposes investors to the possibility that the inflation rate will outpace the interest rate represented on the coupon. In order to protect against this, a Treasury Inflation-Protected Security automatically increases its principal according to the inflation rate as tracked by the Consumer Price Index. Thus, while the coupon rate does not increase, the dollar amount paid does. Because TIPS are so safe, they offer a very low rate of return. See also: Real Return Bond.

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TIPS

See Treasury Inflation-Protected Securities.

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Inflation-protected security (TIPS). US Treasury inflation-protected securities (TIPS) adjust the principal twice a year to reflect inflation or deflation measured by the Consumer Price Index (CPI).

The interest rate is fixed and is paid twice a year on the adjusted principal. So if your principal is larger because of inflation you earn more interest. If it's lower because of deflation, you earn less.

You can buy TIPS with terms of 5, 10, or 20 years at issue using a Treasury Direct account or in the secondary market. At maturity you receive either the adjusted principal or par value, whichever is greater.

You owe federal income tax on the interest you earn and on inflation adjustments in each year they're added even though you don't receive the increases until the security matures. However, TIPS earnings are exempt from state and local income taxes.

These securities provide a safeguard against deflation as well as against inflation since they guarantee that you'll get back no less than par, or face value, at maturity.

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Treasury Inflation Protected Securities (TIPS)

What Does Treasury Inflation Protected Securities (TIPS) Mean?

Refers to a Treasury note or bond that is adjusted for inflation. Like other Treasuries, an inflation-indexed security pays interest every six months and pays the principal when the security matures. The difference with TIPS is that the coupon payments and underlying principal are increased automatically to compensate for inflation as measured by the consumer price index (CPI). Also referred to as Treasury inflation-indexed securities.

Investopedia explains Treasury Inflation Protected Securities (TIPS)

If U.S. Treasuries are the world's safest investments, one might say that TIPS are the safest of the safe. This is the case because the real rate of return, which represents the growth of the investor's purchasing power, is guaranteed. The downside is that because of that safety, TIPS offer very low interest rates. Other countries have similar securities. For example, TIPS in Canada are called real return bonds (RRB).

Related Terms:
• Consumer Price Index—CPI
• Government Security
• Inflation
• Interest Rate
• Real Rate of Return