TIPS provide protection against inflation. The inflation-indexed bonds, TIPS, are issued by the U.S. Treasury. The principal is adjusted to the CPI (Consumer Price Index) so that the principal investment is protected. Therefore, it provides a constant coupon rate but generates a different amount of interest when multiplied by the inflation adjusted principal. This is a great way to protect the investor from inflation. They are currently comes in 5-, 10- and 20-year maturities. When matured the investor receives the adjusted principal or the original principal, whichever is greater.
TIPS pay interest twice a year but holds until maturity. The interest payment rises with the inflation and falls with the deflation. Therefore, most people hold TIPS in mutual funds or tax-differed retirement accounts. TIPS are also exempt from local and state income tax. TIPS can be bought by individuals as well as corporations, trusts, estates, and partnerships etc. They can be purchased directly from the US Treasury (TreasuryDirect) as well as banks and brokers with a $100 minimum investment and in $100 increments. Purchasing TIPS directly from the Treasury may avoid paying fees to brokers.
TIPS are considered as extremely low-risk investments because they are backed by the U.S. government and the par value rises with inflation.