Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, also knows as TIPS, provide investors against the risk of inflation. The principal of a TIPS increases with inflation and decreases with deflation. TIPS are measured and priced against the Consumer Price Index. TIPS pay interest twice per year at a fixed rate. The rate is applied to the adjusted principal, so like the principal, the interest payments will increase and decrease depending on the Consumer Price Index. When a TIPS matures, the investor is paid the adjusted principal or original principal, whichever is greater.

TIPS are issued in 5, 10 and 20 year terms in multiples of $100. The price and interest rate are determined at auction. TIPS can be held until maturity, or sold in the secondary market before the security matures.

TIPS are sold by the U.S. Government at the TreasuryDirect website. You can bid for a treasury bill in one of two ways:

Noncompetitive bid
You agree to accept the discount rate determined at auction. With this type of bid, you are guaranteed to receive the TIPS you want and in the full amount you are willing to pay.
Competitive bid
With a competitive bid, you specify the discount rate you are willing to accept. Your bid may be 1) accepted in the full amount you want, 2) accepted in less than the full amount you want if your bid is equal to the high discount rate, or 3) rejected if the rate you specify is higher than the discount rate set at the auction.

Competitive bids can only be placed if you use a bank, broker or dealer. You may place noncompetitive bids on the TreasuryDirect website, bank, dealer or broker. In single auction, you may buy up to $5,000,000 in TIPS by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding. All TIPS are now issued and held electronically.

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