Treasury inflation-protected securities or tips, Financial Management

Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds, the US Treasury offers. The first offer was made in the year 1997. As the name suggests, it offers protection from inflation. In this type of securities, the interest is paid every six months and the principal amount at the time of maturity. These are normally offered in 5-year, 10-year and 20-year maturities. The specific difference between TIPS and other types of treasury securities is that the coupon amount and the outstanding principal amount in TIPS gets automatically increased to compensate for inflation as measured by the Consumer Price Index (CPI).

CPI is an index used for measuring inflation. The principal amount of TIPS gets adjusted to the CPI so that the purchasing power of the investor is not affected due the inflation. Though the coupon rate is constant in the case of TIPS, it still provides an interest amount which is duly multiplied by the inflation-adjusted principal. Thus, it is evident that TIPS protects its investors against inflation.

The US treasuries are considered safe investments. Of all these securities, TIPS are considered the safest treasury securities. The reason is that investors in TIPS get the rate of return duly compensated with the increase in inflation rate. This means the rate of return representing the growth of purchasing power is guaranteed. Due to this feature, it offers a low rate of return to its investors.

The interest payable on TIPS is taxable as per federal income tax laws in the year of receipt of such interest amount. The amount credited as an adjustment against inflation is also taxable every year. This tax treatment projects that the amount generated by this type of security is inversely related to inflation till the security reaches its maturity. In simple terms, when there exists no inflation then the amount generated may be exactly the same as for a normal bond. The investor receives the coupon amount less the taxable amount on the coupon amount. Similarly, where there is inflation the investor receives the coupon amount as per CPI less the taxable amount on the Coupon amount. Here, the investor has to pay an additional tax on the inflation adjusted principal.               

Posted Date: 9/8/2012 6:45:51 AM | Location : United States







Related Discussions:- Treasury inflation-protected securities or tips, Assignment Help, Ask Question on Treasury inflation-protected securities or tips, Get Answer, Expert's Help, Treasury inflation-protected securities or tips Discussions

Write discussion on Treasury inflation-protected securities or tips
Your posts are moderated
Related Questions
Conversion value is the amount which investors will receive by immediately exchanging the bonds for equity stock and selling the stock at prevailing market

Why are trend analysis and industry comparison important to financial ratio analysis? Trend analysis assists financial analysts and managers see whether a company's current fin

A manager must be able to quantify as to what will result from an adverse change in interest rates to control interest rate risk. Different types of valuation mode

ARROW as an FSA's risk based approach to regulation ARROW stands for Advanced, Risk-Responsive Operating Framework. In January 2000, FSA set out a proposed approach to regulati

It is not easy to determine the theoretical value of non-treasury securities. However, we can use the treasury spot rate for the valuation of non-treasury security.

Roxanne invested $560,000 in a new business 7 years ago. The business was expected to bring in $8,000 each month for the next 26 years (in excess of all costs). The annual cost of

The management of Border Bank has asked you to help with it with its market risk calculations. It has compiled the following data on its financial assets: • $500 million of amorti

Project Specifications Complete an individual Financial Report and Analysis. You will select a company that you would like to analyze based on the parameters provided by the

2010 equity balance required: (600-20 - 25 - 15 - 20)= 520 employees eligible Total expected equivalent value = 520 x 500 options x $1.48 = $384,800 $384,800 x 3/4 years = $28

MBS are the most complicated securities that are sensitive to interest rates. The factors that affect the price of MBS are varied and most of th