This week we’re talking about TIPs, which stands for Treasury Inflation-Protected Securities.
TIPs are a kind of U.S. Treasury bond created to protect investors from inflation.
How? They are indexed to inflation, which means when you receive the semi-annual interest payments the government takes the consumer price index into account.
Payments are calculated based on the inflated principal, so if there is inflation during the life of the bond, it adds the percent of inflation to protect your investment.
- They come in 5, 10 30-year maturities.
- These are U.S. securities backed by the full faith and credit of the U.S. government, which means they are very safe with no credit or default risk.
The down side to this investment is they pay a lesser interest rate than a regular U.S. Treasury note or bond, and should there be no inflation or deflation you get no benefit at all.
Further reading:
More: Money Monday section