Treasury Inflation-Protected Securities (TIPS)

TIPS Facts:

• First issued in 1997 to help make sure that the value of the securities would not drop when the economy faced inflation (a rise in the prices you pay for the things you buy)
• The term can be 5, 10, 20 or 30 years
• Set or fixed interest rate
• Can be bought from the U.S. Treasury, a bank, or broker

TIPS work this way: The security's principal is adjusted based on the Consumer Price Index (CPI) - a way the Government measures the average price Americans are paying for the things they buy. If prices go up, known as inflation, the principal does too. If prices go down, known as deflation, so does the security's principal. TIPS have a set or fixed interest rate that is decided at an auction. Interest on TIPS is paid every six months. The changes in the principal affect the amount of interest you will get paid. Because the rate is paid on the principal, the interest paid will increase if the principal increases and decrease if the principal decreases.

At the end of the TIPS' term, you receive either its original face value, or the inflation-adjusted value, whichever amount is larger. You can hold the TIPS until it reaches its full value, or sell it before the end of its term.