What is Treasury Inflation-Protected Securities?

What is Treasury Inflation-Protected Securities?

US Treasury Inflation-Protected Securities (TIPS) are US government bonds introduced into the financial market in 1997 to provide inflation protection.

Because it is a bond, it is classified as a very safe investment as a fixed income investment, because there is not much risk of losing capital or money, but investors should not expect huge profits.

These investments are designed to protect wealth, not to increase initial investment at a radical rate. They are mainly used to provide a diversified portfolio of investments. 

Tips can be sold in what is known as the secondary market. The secondary market allows investors to sell securities and bonds to each other before the maturity date. Like inflation-protected Treasury bills, they also have a face value and grow at interest rates.

TIPS interest is usually paid twice a year at a predetermined fixed interest rate. Even if treasury inflation-protected securities uses a fixed interest rate, the interest rate of each payment period can be based on the change of the face value of the investment or the amount of the principal, because there is a direct connection between the two.

Treasury inflation-protected securities also have a predetermined maturity date, which is the maturity date of the securities. Investing in TIPS is to bet that inflation will grow during the bond’s duration, and investors will receive the original principal of the investment or the adjusted principal amount, whichever is greater.

The structure of the principal amount should ensure that when the US economy experiences inflation, the principal amount will increase. During a deflationary economy, the principal will depreciate. Inflation is measured by a major US economic barometer called the Consumer Price Index (CPI).

When the index appreciates, it represents greater inflation. When the CPI falls, it represents a decrease in inflation and may lead to deflation. In the U.S. economy, deflation is rare, but it poses a small threat, because the higher the inflation rate, the greater the expenditure, but these The expiration time is only valid for a specific period.

These government securities are issued by the Federal Reserve and can be purchased and held for 5, 10, or 30 years. Usually, these securities can be purchased in increments of 100 U.S. dollars (USD) through auctions.

Similarly, if investors do not want to hold the investment within the time limit, Treasury inflation-protected securities can be sold on the secondary market, which is a regulated market that allows investors to sell securities to each other before the maturity date.

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