Nested Interest

Treasury Inflation Protected Securities (“TIPs”) are bonds issued by the United States federal government that pay coupons and a maturity value that is linked to the Consumer Price Index (“CPI”).  Coupons are paid twice annually, by applying a fixed coupon rate to a principal amount that is indexed to the CPI.  Upon maturity, you are paid the greater of the inflation-adjusted principal amount, or the original principal amount.

TIPs are available in maturities of 5, 10, and 30 years.

Because payments are indexed to the CPI it can serve as a hedge against general inflation, as reflected by the CPI.  TIPs are also viewed as a very secure investment because of the backing they receive from the United States Federal government.