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Treasury Inflation Protected Securities

Treasury Inflation Protected Securities

Treasury Inflation Protected Securities or TIPS for short are debt instruments that are issued by the U.S. government. TIPS are indexed with the Consumer Price Index (CPI), and adjust accordingly to the inflation rate presented in the CPI.

Treasury Inflation-Protected Securities (TIPS) Explained

Treasury TIPS means that the security will adjust for inflation or deflation on whether the CPI increases or decreases. Because of this extra protection from inflation rates, TIPS owners are forced to pay more in taxes, a major disadvantage, when the security matures or it is sold. Treasury tips are normally sold with 5, 10, or 30 year maturities in denominations of $1,000 or more.

Treasury Inflation Protected Securities (TIPS) Example

Timmy has just invested in a TIPS note which has a 4% rate of return and a 10 year maturity. The following results are how an inflation protected security react to inflation and the market.

If interest rates rise by 1% in the first year then the principal would change to $1,010 (1,000 * 1.01). Thus the coupon rate would be calculated by taking 4% * $1,010 which equals a coupon payment of $40.40.

If the interest rates were to rise again by 2% then the new principal would change to $1,020 ($1,000 * 1.02), and the coupon payment would be 4% * $1,020 which equals $40.8.

Note: The new coupon payment and interest will change in the same manner no matter if deflation or inflation occurs.

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treasury inflation protected securities
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treasury inflation protected securities

See Also:
Treasury Securities
Treasury Notes (t notes)

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Consumer Price Index (CPI)

See Also:
Economic Indicators
What is Inflation?
Supply and Demand Elasticity
The Feds Beige Book
Stagflation

Consumer Price Index (CPI) Definition

The consumer price index is an economic indicator that measures changes in prices of typical consumer expenses. It is also used to measure inflation and the cost of living in a geographic area. For example, if living expenses rise in a particular region due to inflation, this would result in an increase in that region’s CPI. The CPI is published monthly by the Bureau of Labor Statistics in the Department of Labor.

Consumer Price Index Basket

Calculate the CPI using the prices of items in a “basket” of typical consumer goods and services. The basket includes food, transportation, shelter, clothing, medical care, entertainment, and other items. Prices are determined by samples taken from stores or providers in the relevant geographic area. Then the prices are weighted according to the item’s significance to the consumer. The core CPI is a variant of the CPI that excludes food and energy prices.

Cost of Living Index

You can also call the consumer price index the cost of living index.

Headline Inflation Definition

Also refer to the consumer price index as headline inflation.

US CPI Components

The U.S. CPI covers more than 200 categories of goods and services. The categories fall into the following 8 groupings:

1. Food and Beverages
2. Housing
3. Apparel
4. Transportation
5. Medical care
6. Recreation
7. Education and Communication
8. Other Goods and Services

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consumer price index

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consumer price index

Consumer Price Index Homepage

If you want more information about the CPI, then go to: www.blg.gov/cpi.

If you want more information about the CPI frequently asked questions, then go to: www.bls.gov/cpi/cpifaq.

US CPI Historical Data

If you want historical CPI data, then go to: ftp.bls.gov/pub.

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