what are treasury inflation protected securities tips 
treasury inflation protected securities tips are a type of treasury security issued by the u s government tips are indexed to inflation to protect investors from a decline in the purchasing power of their money daniel fishel investopediaunderstanding treasury inflation protected securities tips the principal value of tips rises as inflation rises inflation is the pace at which prices increase throughout the u s economy as measured by the consumer price index cpi inflation becomes an issue when there isn t a commensurate rise in real wage growth to offset the negative effects of rising prices 1tips are a popular asset for 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 however the interest payment amounts can vary since the rate is applied to the adjusted principal or value of the bond if the principal amount is adjusted higher over time due to rising prices then the interest rate will be multiplied by the increased principal amount as a result investors receive higher interest or coupon payments as inflation rises conversely investors will receive lower interest payments if deflation occurs 1tips are issued with maturities of five 10 and 30 years and 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 1tips can be purchased directly from the government through the treasurydirect system in 100 increments with a minimum investment of 100 and are available with the aforementioned maturities 1some investors prefer to get tips through a tips mutual fund or exchange traded fund etf however purchasing tips directly allows investors to avoid the management fees associated with mutual funds tips price relationship to inflationtips are important since they help combat the inflation risk that erodes the yield on fixed rate bonds inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond as a result the bond s interest payments might not keep up with inflation for example if prices rise by 3 and an investor s bond pays 2 then the investor has a net loss in real terms tips are designed to protect investors from the adverse effects of rising prices over the life of the bond the par value principal increases with inflation and decreases with deflation as measured by the cpi as mentioned earlier when tips mature bondholders are paid the inflation adjusted principal or original principal whichever is greater 1suppose an investor owns 1 000 in tips at the end of the year with a coupon rate of 1 if there is no inflation as measured by the cpi then the investor will receive 10 in coupon payments for that year if inflation rises by 2 however then the 1 000 principal will be adjusted upward by 2 to 1 020 the coupon rate will remain the same at 1 but it will be multiplied by the adjusted principal amount of 1 020 to arrive at an interest payment of 10 20 for the year conversely if inflation were negative known as deflation with prices falling 5 then the principal would be adjusted downward to 950 the resulting interest payment would be 9 50 over the year however at maturity the investor would receive no less than the principal amount invested of 1 000 or an adjusted higher principal if applicable 1the interest payments during the life of the bond are subject to being calculated based on a lower principal amount in the event of deflation but the investor is never at risk of losing the original principal if held to maturity if investors sell tips before maturity in the secondary market they might receive less than the initial principal 1tips don t work as a short term hedge against spikes in inflation their real function is to protect investors against rising living costs over the long term 