Treasury Inflation-Protected Securities (TIPS) Information
Treasury Inflation-Protected Securities (TIPS) are marketable securities where the principal is adjusted by changes in the Consumer Price Index (CPI). With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.
The relationship between TIPS and the Consumer Price Index affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.
At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.
Treasury provides TIPS Inflation Index Rations that allow you to easily calculate the change to principal resulting from changes in the Consumer Price Index.
TIPS are sold in Treasury Direct and Legacy Treasury Direct, and also through banks, brokers, and dealers. As of January 2007, the 20-year TIPS is no longer sold in Legacy Treasury Direct, but it is available in Treasury Direct. Currently, only individual accounts can be held in Treasury Direct. The price of a TIPS can be less, equal or greater than the face value.
TIPS Summary:
TIPS are issued in terms of 5, 10, and 20 years. The 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect.
The interest rate on a TIPS is determined at auction.
TIPS are sold in increments of $100. The minimum purchase is $100.
TIPS are issued in electronic form.
You can hold a TIPS until it matures or sell it in the secondary market before it matures.
In a single auction, an investor can buy up to $5 million in TIPS by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.
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