TIPS (Treasury Inflation-Protected Securities)
TIPS are US Treasury bonds whose principal value adjusts with inflation (CPI), providing protection against purchasing power erosion.
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Definition
TIPS are US Treasury bonds whose principal value adjusts with inflation (CPI), providing protection against purchasing power erosion.
Use case
Used in fixed income workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about TIPS (Treasury Inflation-Protected Securities)
TIPS pay fixed coupon rates but on inflation-adjusted principal. In deflation, principal is floored at original par. Real yield (yield after inflation) is known at purchase if held to maturity. TIPS are ideal for inflation protection but can underperform nominal Treasuries if inflation stays low.
Example: 10-year TIPS with 2% coupon, $1,000 par. Year 1 inflation: 3%. New principal = $1,030. Coupon payment = 2% × $1,030 = $20.60. Principal continues adjusting with inflation, ensuring real return of ~2% regardless of inflation path.