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About Government/Agency Bonds

An Example of How TIPS Work

Suppose an individual invests $1,000 on January 15 in a new inflation-protected 10-year note with a 3% real rate of return.

  • If inflation was 1% during the first six months of that year, then by mid-year the inflation-adjusted principal amount of the security would be $1,010. ($1,000 x 1.01 = $1,010).
  • In addition, at mid-year, on July 15, the investor would receive the first semiannual interest payment of $15.15 ($1,010 times 3% divided by 2).
  • Suppose, then, that inflation accelerated during the second half of the year, so that it reached 3% for the full year.
  • By the second semiannual interest payment date, January 15, the inflation-adjusted principal amount of the security would be $1,030. ($1,000 x 1.03 = $1,030).
  • The second semiannual interest payment would be $15.45 ($1,030 times 3% divided by 2).

A comparison of principal value over length of security


 

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.