| Combating Inflation with Treasury Inflation Protection Securities (TIPS) |
by S. Wade Hansen Are You Worried About Inflation? The Financial Crisis of 2008 stomped out any short-term concerns about inflation because energy and commodity prices were in freefall, consumers stopped spending and the economy was entering a recession.  However, many investors are worried that while we may not be facing huge inflation risks now, the deficit spending by the U.S. Government is going to lead to rampant inflation in the future. If you are concerned about inflation, take heart. All is not lost. As you will see in the video on Understanding Treasury Inflation Protection Securities (TIPS), you can protect a portion of your portfolio using TIPS. Treasury Inflation Protection Securities (TIPS) are government-issued securities that are designed to combat the negative impact inflation can have on your investments. Basically, TIPS are bonds—they have a principal amount and a set interest rate—that offer a specific yield. [To learn more about how TIPS and other bonds work, check out our article and video on Understanding Bond Yields.] Here are the basic specs: -The interest rate on a TIPS is determined at auction -TIPS are sold in increments of $100, and they -TIPS are issued in terms of 5, 10, and 20 years. How Treasury Inflation Protection Securities (TIPS) Work Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases. The relationship between TIPS and the Consumer Price Index affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases. At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation. Keep up with us:
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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