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U.S. Treasury-Inflation Protected Securities ( TIPS)
If US. Treasury bills, notes, and bonds are the world’s safest investments -- and they are -- then you might say Treasury Inflation-Indexed Securities are the safest of the safest. Why? Because their ultimate value cannot be diminished by inflation. Treasury Inflation-Indexed Securities, often called Treasury Inflation-Protected Securities or TIPS, are a special type of Treasury notes and *bonds. As with other notes and bonds, when you buy an Inflation-Indexed note or bond, you receive interest payments every six months and a payment of principal when the security matures. The difference is this: Unlike the situation with other notes and bonds, the interest and redemption payments for Treasury Inflation-Indexed Securities are tied to inflation.
Interest
Like other notes and bonds, Treasury Inflation-Indexed Securities pay a fixed rate of interest. But this fixed rate of interest is applied not to the par amount of the security, but to the inflation-adjusted principal. So, if inflation occurs throughout the life of your security, every interest payment will be greater than the previous one. On the other hand, in the rather unusual event of deflation, your interest payments will decrease.
Specifically, each interest payment is calculated by multiplying the inflation-indexed principal (regardless of whether it’s greater or less than the par value) by one-half the interest rate determined at auction.
*The Treasury Department hasn’t offered a Treasury bond since its decision in October 2001 to suspend issuance of the 30-year bond.
Updated September 3, 2002
Summary of Marketable Treasury Inflation-Indexed Securities
The Treasury Department published final rules on January 6, 1997, which sets out the terms and conditions for Marketable Inflation-Indexed Securities. The final rules were adopted, without substantive change, the proposed rules that were published for comment on September 27, 1996. Eight comment letters were received in response to the proposal.
The following is a summary of some of the key provisions and features of these securities:
- The interest rate, which is set at auction, remains fixed throughout the term of the security.
- The principal amount of the security is adjusted for inflation, but the inflation-adjusted principal will not be paid until maturity.
- Semiannual interest payments are based on the inflation-adjusted principal at the time the interest is paid.
- At maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at original issue.
NOTE: ALL OF THE PRECEDING MATERIAL WAS TAKEN FROM THE WEBSITE OF THE DEPARTMENT OF THE TREASURY OF THE UNITED STATES OF AMERICA ON 10/1/02. SAME AND ADDITIONAL MATERIAL CAN BE FOUND ON THE INTERNET AT “www.publicdebt.treas.gov/sec/seciis.htm”
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