Inflation-protected security

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Inflation-Protected Security

A bond that protects the bondholder from inflation. Most bonds 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, an inflation-protected security automatically increases its principal according to the inflation rate. Thus, while the coupon rate does not increase, the dollar amount paid does. Because an IPS is so safe, it offers a very low rate of return. See also: Real Return Bond, TIPS.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Treasury yields and their equivalent Treasury Inflation Protected Securities (TIPS).
"The way to get at that is that we look at the difference between the 10-year Treasury yield minus the TIPS (treasury inflation protected securities) yield, and that is suggesting at the moment that over the next 10 years people that are buying and selling securities essentially believe that the inflation rate will average 2.1%."
The yield on US five-year Treasury Inflation Protected Securities, bonds known as TIPS that are designed to protect against inflation, rose to its highest level since 2009.
As a strategic move for a rising-rate environment, he points to Treasury Inflation Protected Securities and bank loans.
"We expect US inflation to pick up over the next 12 months, mainly driven by the tighter US labour market, and would advise investors to hedge their portfolio with an overweight in US Treasury inflation protected securities versus US nominal government bonds," said UBS' Effenberger.
Treasury Inflation Protected Securities, lifted the return to 2.7 percent.
Short-term inflation expectations as measured by the yield gap between five-year Treasury Inflation Protected Securities and regular five-year Treasuries fell to 1.16 per cent on Friday, the lowest in nearly 4-1/2 years, Tradeweb and Reuters data showed.
The three-year note had the highest ratio of 3.35, while demand for five-year debt that protects against consumer-price gains, known as Treasury Inflation Protected Securities, was the weakest with a ratio of 2.29, the data show.
Inflation-linked bonds, which in the US are known as Treasury Inflation Protected Securities (or TIPS), are bonds that pay investors a fixed inflation-adjusted coupon and principal.
government issues both kinds, so looking at the difference between the interest rate on nominal treasury bonds and TIPS (Treasury Inflation Protected Securities), which are protected against inflation and thus offer a real rate of return, provides an estimate of expected inflation, at least among the bond-buying public.
The most common inflation-indexed securities are Treasury Inflation Protected Securities, known as TIPS.