TIPS stands for Treasury Inflation-Protected Securities. These are U.S. government bonds where the principal amount adjusts based on inflation. The interest rate stays the same, but you receive payments based on the adjusted principal. TIPS help protect your purchasing power if prices rise significantly.
You buy a TIPS bond with a $10,000 principal and 2% interest rate. If inflation is 3% that year, your principal adjusts to $10,300. You then earn 2% interest on the $10,300, giving you $206 in interest that year instead of $200.
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