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Types of Bonds

Summary of the Structure and Index

Principal amount.

The principal amount of TIPS are adjusted for changes in the level of inflation. The inflation adjusted principal amount of the securities can be calculated daily. However, the inflation adjustment will not be payable by Treasury until maturity, when the securities will be redeemed at the greater of their inflation-adjusted principal amount or the principal amount of the securities on the date of original issuance (i.e., par). (See the section on Payment at Maturity below.)

Index.

The index for measuring the inflation rate is the non-seasonally adjusted CPI-U.* CPI-U was selected by Treasury because it is the best known and most widely accepted measure of inflation.

Interest payments.

Every six months Treasury pays interest based on a fixed rate of interest determined at auction. Semiannual interest payments are determined by multiplying the inflation-adjusted principal amount by one-half the stated rate of interest on each interest payment date.

Payment at maturity.

If at maturity the inflation-adjusted principal is less than the par amount of the security (due to deflation), the final payment of principal of the security by Treasury will not be less than the par amount of the security at issuance. In such a circumstance, Treasury will pay an additional amount at maturity so that the additional amount plus the inflation-adjusted principal amount will equal the par amount of the securities on the date of original issuance.

Maturity.

Currently, TIPS are issued with 5-year, 10-year, and 20-year maturities.

Stripping.

TIPS are eligible for the STRIPS program (Separate Trading of Registered Interest and Principal of Securities) as of the first issue date.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.