InterestandPrincipal-TreasuryDirect.pdfVIP

Treasury Inflation-Protected Securities (TIPS) Treasury Inflation-Protected Securities (TIPS) are marketable Treasury securities whose principal and interest payments are adjusted for inflation. Competitive bidding at auction sets the security’s fixed interest (or coupon) rate. The interest rate is applied to the adjusted principal amount. Like all marketable U.S. Treasury securities, TIPS are backed by the full faith and credit of the United States. Interest and Principal Interest payments on TIPS are made semiannually. They’re based on a principal amount that is adjusted for inflation using the Consumer Price Index for Urban Consumers (CPI-U).1 We call this process “indexing.” We determine the index ratio by dividing the current CPI-U level by the CPI-U level that applied when the securities were issued. As measured by the index, the principal changes at the same rate as the CPI-U. Since interest payments are a percentage of the principal, the interest amount changes as the principal adjusts. At maturity, if inflation has occurred and increased the value of the security during its term, Treasury pays the owner the inflation-adjusted principal. On the other hand, if deflation occurred over the life of the security and decreased the security’s value, Treasury pays the owner the original face value of the security. Buying TIPS TIPS are available to individuals as well as institutional investors. You can buy TIPS in $100 increments and in terms of 5, 10, and 30 years. You can buy them directly from the Treasury or through a financial institution or broker. All Treasury securities purchased directly from the Treasury are sold in single-price auctions, which means everyone gets the same price – equivalent to the highest accepted yield at that auction. Securities purchased from a financial institution or broker ma