Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities are issued by the United States government to provide protection against inflation. They are indexed to inflation to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain their real value. TIPS will continue paying out twice a year until they mature. They can also be used to diversify an investment portfolio or supplement retirement income.
NOTES
- TIPS are a popular asset for both protecting portfolios from inflation and profiting from it because they pay interest every six months based on a fixed rate determined at the bond's auction.
- The principal value of TIPS rises as inflation rises.
- TIPS are considered a low-risk investment because the U.S. government backs them.
- At maturity, TIPS return the adjusted principal or the original principal, whichever is greater.
- Some investors prefer to get TIPS through a TIPS mutual fund or exchange-traded fund.
- Purchasing TIPS directly allows investors to avoid the management fees associated with mutual funds.
- TIPS payout in two ways: based on an increase in the consumer price index (CPI) and the yield above inflation.
- They can lose value when the CPI drops, but never to the point where they’re worth less than their face value.
RATES AND TERMS
- TIPS are issued in terms of 5, 10, and 30 years.
- TIPS Inflation Index Ratios can be used to calculate the Inflation adjustment to principal on previously issued TIPS.
- TIPS can be held until maturity or sold before maturity.
TAX CONSIDERATIONS
ADVANTAGES
- The principal increases with inflation. At maturity, bondholders are paid the inflation-adjusted principal/
- Investors will never be paid less than their original principal when TIPS mature
- Interest payments increase as inflation increases since the rate is calculated based on the adjusted principal balance
DISADVANTAGES