Question

3 Bloomberg Market Concepts * Risposte Bloomberg Market Cor X New Tab -325/central-bankers-amp-interest-rates-25-mincipa 13 KNOWLEDGE CHECK Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do TIPS shield lenders from inflation?

Answer 1

Investors who fear inflation may buy Treasury Inflation Protected Securities. It is important to first understand the term "Inflation". It refers to a general increase in prices and the fall in the purchasing power of the consumers.

Next, we need to understand the Treasury Inflation-Protected Securities, or TIPS. These are a form of U.S. Treasury bonds which are designed to help the investors to protect against the inflation. They are indexed to match the inflation rate.

The mechanism behind them is that these bonds are indexed in order to cater the needs of the inflation. The principal behind the TIPS is that it increases with the rate of inflation and it decreases with deflation. The rate of inflation / deflation is measured by the Consumer Price Index.

They are governed by the government, so are completely secured to invest. The investors receive a fixed interest rate as the bond is at par value and is adjusted with the inflation rate. When a TIPS matures, the investors are paid the adjusted principal or original principal, whichever is greater.