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What are TIPS?

Government bonds that offer inflation protection are known as Treasury Inflation-Protected Securities (TIPS). They are issued by the US Treasury Department and are supported by the US government's full faith and credit.

An investor that purchases TIPS will get a coupon payment based on the bond's principal twice a year. Nevertheless, the bond's principal amount is adjusted for inflation using the Consumer Price Index (CPI). Thus, if inflation increases, the bond's principal will rise and the investor would receive a bigger coupon payment. On the other hand, if inflation declines, the bond's principal will also decrease and the holder would receive a lesser coupon payment.

One of the primary advantages of investing in TIPS is that they provide protection against inflation. Unlike other types of bonds, where the coupon payment remains fixed regardless of inflation, TIPS adjust the coupon payment for inflation, which means that the investor's purchasing power is preserved. This makes TIPS an attractive investment option for investors who are concerned about inflation eroding the value of their investment.

Another benefit of investing in TIPS is that they are exempt from state and local taxes. This means that investors can earn interest on their investment without having to pay state or local taxes on that income. Additionally, TIPS have a low minimum investment requirement, with a minimum investment of only $100, which makes them accessible to a wide range of investors.

One of the drawbacks of investing in TIPS is that they tend to have lower yields than other types of bonds. This is because the inflation protection feature of TIPS comes at a cost to the issuer, which is reflected in the lower yield. Additionally, if inflation is negative, the principal amount of the bond will not be adjusted downward, which means that the investor may receive a lower return than they would with a conventional bond.

TIPS are available in maturities of 5, 10, and 30 years. This means that investors can choose the maturity that best suits their investment goals and risk tolerance. For example, investors who are looking for a short-term investment may choose a 5-year TIPS, while those who are looking for a longer-term investment may choose a 30-year TIPS.

Investors can purchase TIPS directly from the US Treasury Department through their website, which means that they do not have to pay fees to a broker or fund manager. This can result in cost savings for investors, which can increase their overall return on investment.

In conclusion, TIPS are a type of government bond that provides protection against inflation. They are backed by the full faith and credit of the US government and have a low minimum investment requirement, making them accessible to a wide range of investors. While TIPS tend to have lower yields than other types of bonds, they offer the benefit of inflation protection, which can help to preserve the investor's purchasing power. Investors can purchase TIPS directly from the US Treasury Department, which can result in cost savings and increase their overall return on investment.

What is a Treasury Note?
What is the ‘Risk-Free Rate of Return’?

Disclaimers and Limitations

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