Treasury Inflation-Protected Securities (TIPS)

Lesson

Treasury Inflation-Protected Securities (TIPS) are U.S. government security designed to protect investors from inflation. The U.S. Department of the Treasury issues them and pays interest semi-annually. The principal value of TIPS adjusts with inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U). When TIPS mature, investors receive the adjusted principal or the original principal, whichever is greater.

Practice Question #1

What is the primary purpose of Treasury Inflation-Protected Securities (TIPS)?

A) To provide investors with a fixed interest rate

B) To protect investors from inflation

C) To offer short-term investment opportunities

D) To finance government spending

Select an option above to see an explanation here.

A) TIPS pay interest, but their primary purpose is to protect against inflation. B) TIPS are designed to protect investors from inflation by adjusting the principal value based on changes in the CPI-U. C) TIPS are not explicitly designed for short-term investment opportunities. D) While TIPS help finance government spending, they aim to protect investors from inflation.

Terms

Treasury Inflation-Protected Securities (TIPS):: U.S. government securities that protect investors from inflation.
Adjusted Principal:: The principal value of TIPS adjusted for inflation.
Original Principal:: The initial principal value of TIPS before any inflation adjustments.

Practice Question #2

How is the principal value of TIPS adjusted?

A) Based on changes in the Federal Reserve's interest rate

B) According to fluctuations in the stock market

C) In response to changes in the Consumer Price Index for All Urban Consumers (CPI-U)

D) By a predetermined schedule set at the time of issuance

Select an option above to see an explanation here.

A) The principal value of TIPS is not directly tied to the Federal Reserve's interest rate. B) TIPS are not affected by fluctuations in the stock market. C) The principal value of TIPS adjusts based on changes in the CPI-U, which measures inflation. D) The principal value of TIPS adjusts in response to changes in the CPI-U, not by a predetermined schedule.

Do Not Confuse With

Treasury Bonds:: Long-term U.S. government securities with maturities of 10 years or more.
Treasury Notes:: Intermediate-term U.S. government securities with maturities of 1 to 10 years.
Treasury Bills:: Short-term U.S. government securities with maturities of less than one year.
Zero-Coupon Bonds:: Bonds that do not pay periodic interest and are sold at a discount from their face value.

Practice Question #3

When do TIPS pay interest?

A) Monthly

B) Quarterly

C) Semi-annually

D) Annually

Select an option above to see an explanation here.

A) TIPS do not pay interest monthly. B) TIPS do not pay interest quarterly. C) TIPS pay interest semi-annually, or twice a year. D) TIPS do not pay interest annually.

Historical Example

In the late 1990s, the U.S. government introduced TIPS to help investors protect their investments from the eroding effects of inflation. This was a response to concerns about the potential for rising inflation rates in the future.