TIPS

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TIPS

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.

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.

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 ?
But now it increasingly seems as if those funds are coming from pure safe-haven accounts, such as money market funds and Treasury Inflation Protected Securities, or TIPS funds.
Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities reached the lowest since January 2.
A second approved final rule allows credit unions to purchase Treasury Inflation Protected Securities. The rule was first presented as an audience question during a 2012 town hall hosted by Matz.
"TIPS pay a lower rate of interest than regular Treasuries," explained <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aauzfi.0WIWc" target="_blank">Bloomberg News</a> when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.
The most watched market-based measure, the "break-even" rate derived from Treasury inflation protected securities (TIPS), uses the difference between the interest rates on a nominal Treasury bond (that is, one not indexed to inflation) and a TIPS.
Categories: Budget and Spending, Assets, Borrowing authority, Cost analysis, Debt held by public, Economic growth, Federal debt, Financial analysis, Financial management, Inflation, Investments, Recession, Treasury Inflation Protected Securities (TIPS), Troubled Asset Relief Program (TARP), US Treasury securities
"We are buying Treasury Inflation Protected Securities (TIPS) as a part of most clients' fixed-income portfolios," says Bill Brennan, principal of Capital Management Group in Washington, D.C.
For example, the difference or spread between the yields of Treasury inflation protected securities (TIPS) and Treasury notes shows that bond investors expect inflation to average just 1.3% over the next five years.
Another proposed rule would permit credit unions to invest in Treasury inflation protected securities, which increase or decrease in value according to inflation.

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