Financial Terms

Treasury Inflation-Protected Securities (TIPS)

Treasuries whose principal adjusts with the CPI.

Bonds & Cash Equivalents Series 65 · Section 2

What is Treasury Inflation-Protected Securities (TIPS)?

The principal rises with inflation (and falls with deflation) as measured by the CPI. The coupon rate is fixed but applies to the adjusted principal, so interest payments rise with inflation too. The annual principal increase is taxable as income each year even though it is not paid until maturity - phantom income - which makes TIPS best held in tax-deferred accounts. At maturity the holder receives the greater of adjusted or original principal.

Treasury Inflation-Protected Securities (TIPS): a worked example

$1,000 of TIPS with a 2% coupon after 3% inflation: principal becomes $1,030 and the annual interest $20.60.

What is the difference between Treasury Inflation-Protected Securities (TIPS) and Treasury Securities?

Ordinary Treasuries protect against default but not inflation. TIPS protect against both - the principal adjusts to the CPI.

Often confused with Treasury Securities - see Treasury Inflation-Protected Securities (TIPS) vs Treasury Securities side by side.

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More terms in Bonds & Cash Equivalents

Certificate of Deposit (CD) A bank time deposit paying a fixed rate for a fixed term, FDIC insured. Commercial Paper Unsecured short-term corporate debt, 270 days or less. Zero-Coupon Bond Sold at a deep discount, pays no interest, matures at par. Asset-Backed Securities (ABS / MBS) Bonds backed by pools of loans - mortgages, auto loans, credit cards. General Obligation (GO) Bond A municipal bond backed by the issuer's full faith, credit, and taxing power. Revenue Bond A municipal bond repaid only from the revenue of a specific project. Insured Municipal Bond A muni with third-party insurance guaranteeing principal and interest. Municipal Bond Tax Treatment Interest usually federally tax-free; gains are not.

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