Treasury Inflation-Protected Securities

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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Treasury Inflation-Protected Securities (TIPS)

Negotiable bonds issued and guaranteed by the U.S. Treasury with returns that are indexed to compensate bondholders for inflation. Indexing is accomplished by adjusting the principal amount of TIPS upward to adjust for changes in the consumer price index. These securities were first issued in 1997 and represent a relatively small portion of U.S. government debt. See also Series I savings bond.

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Treasury inflation-protected securities (TIPS). TIPS, or Treasury inflation-protected securities, are inflation-indexed Treasury bonds and notes.

TIPS pay a fixed rate of interest like traditional Treasurys, but their principal, to which the interest rate is applied, is adjusted twice a year to reflect changes in inflation as measured by the Consumer Price Index (CPI). However, those increases are not paid until the end of the term.

Twice a year the interest rate is multiplied by the new principal, so the interest you receive will increase or decrease as well. Interest is federally taxable, as are any increases in the value of your principal. The interest is exempt from state and local income taxes.

At maturity, you're repaid the inflation-adjusted principal or par value, whichever is more.