Treasury Inflation-Protected Security (TIPS)
Candlefocus EditorTIPS have a face value, an interest rate and a maturity date. Payments are made every six months and are based on the amount of the inflation rate over the last semester. Beyond their principal, TIPS also offer an inflation-adjusted return, meaning their interest rate rises with the inflation rate. Because principal payments and interest payments increase with inflation, TIPS offer some protection against a decline in the purchasing power of money.
TIPS are issued in terms of 5, 10, and 30 years. One advantage of TIPS is that they require no management as they are held in Treasury Direct accounts and transfer when investors sell them until maturity. They can be bought in increments of $100 or more with some accredited brokers, from most banks and from TreasuryDirect.gov.
Given their unique features and the fact that the principal is protected, TIPS offer an attractive investment for those looking for a safe, inflation-protected option. However, since TIPS make adjustments based on inflation, when inflation rises, so does the yield of the bond. Therefore, it may not be the best option for investors wanting steady returns despite a fluctuation in inflation. Also, since the principal amount is adjusted along with inflation, investors may not get a full return on the amount they invested in the bond if they sell it before maturity.
Overall, TIPS can be a great tool for investors looking to maintain a certain level of inflation protection. By taking advantage of the TIP's ability to adjust to inflation, investors can protect the long-term purchasing power of their savings and reduce their overall risk.