Treasury Inflation Protected Securities(TIPS) are a type of bonds and notes issued by the U.S Treasury. TIPS are unique due to their interest and principle payments are arranged to the rate of inflation as measured by Consumer Price Index. So TIPS offer explicit inflation protection not provided by the other nominal bonds.
There are some characteristics of TIPS:
- Maturities available with 5,10, 20 years.
- Bond’s principals increases or decreases with the rate of the consumer price Index-based.
- Payments of interest are a fixed percentage applied to an decreasing or increasing principal.
- Original principal or the adjusted principal whichever is greater, is paid to the investor upon maturity
Examples of Treasury Inflation Protected Security:
TIPS are very different from conventional bond. Coupon payments are made a conventional fixed rate coupon bond on the par amount. They return a par amount at maturity date of the bond. Not so with TIPS.