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.

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.

References in periodicals archive ?
large-cap stocks and inflation-protected securities and increases it slightly in mid-cap stocks, emerging market equities, and commodities.
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9561) requiring the use of the coupon interest method to amortize a premium in excess of a de minimis amount related to Treasury inflation-protected securities (TIPS).
Inflation expectations are just the nominal yield minus the same Treasury inflation-protected securities, the difference being so-called breakeven inflation expectation.
Low-risk Treasury Inflation-Protected Securities or TIPS and I-bonds' returns, however, are linked to the inflation rate to ensure a real return on your investment.
Payroll participants can purchase electronic savings bonds and other Treasury securities such as bills, notes, bonds and Treasury Inflation-Protected Securities using TreasuryDirect, a secure web-based system provided by Treasury's Bureau of the Public Debt.
Treasury Inflation-Protected Securities (TIPS) are a different breed of Treasury that offers little interest, but is adjusted for inflation twice a year.
Looking forward, investors can protect themselves against inflation in the US by buying Treasury Inflation-Protected Securities (TIPS), which index interest and principal payments to offset the rise in the consumer price level.
Treasury inflation-protected securities adjust the principal of the bond to make up for the loss of purchasing power to inflation.
Demand for US Treasury inflation-protected securities, or TIPS, has risen but it is more of a normalization from a near complete rout during the height of the crisis.

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