Frequently Asked Questions
Question: What are Treasury Inflation Protected Securities (TIPS)?
Answer:
TIPS provide investors with a means to hedge against inflation. TIPS are similar to traditional Treasury bonds in that they pay coupon interest semi-annually. Unlike traditional Treasury bonds, however, the principal of a TIPS bond is adjusted to reflect changes in inflation over the life of the bond. The adjustment in principal moves in tandem with the Consumer Price Index (CPI). Since inflation rates tend to increase over time, these adjustments are generally positive. While unlikely, there can be no guarantees that the CPI won't decline, in turn causing a negative adjustment to the principal of TIPS. When TIPS mature, they are redeemed at their inflation adjusted principal or their original par value, whichever is greater.
Investors may purchase TIPS directly from the federal government, through a brokerage house that offers individually managed TIPS portfolios, or via a TIPS managed ETF or mutual fund.
TIPS have historically been effective at managing inflation risk and warrant consideration as a component of an investor's fixed income allocation.
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