Wednesday, December 29, 2010

TIPS

TIPS stands for Treasury Inflation Protected Securities. These bonds are issued by the US government and are indexed to inflation i.e. the principal increases with inflation (or decreases with deflation), as measured by the Consumer Price Index (CPI). At maturity the adjusted principal or original principal (which ever is greatest) is paid to the registered holder of the security. Tips make semi-annual interest payments at a fixed rate, which is applied to the adjusted principal amount - thus interest payments are also linked to inflation. The market price of these securities is used by economists and market strategists to derive the market implied inflation outlook.

Synonyms: Treasury Inflation Protected Securities, Inflation linked bonds, Inflation protected investment

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