Treasury inflation-protected securities or tips, Financial Management

Assignment Help:

Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds, the US Treasury offers. The first offer was made in the year 1997. As the name suggests, it offers protection from inflation. In this type of securities, the interest is paid every six months and the principal amount at the time of maturity. These are normally offered in 5-year, 10-year and 20-year maturities. The specific difference between TIPS and other types of treasury securities is that the coupon amount and the outstanding principal amount in TIPS gets automatically increased to compensate for inflation as measured by the Consumer Price Index (CPI).

CPI is an index used for measuring inflation. The principal amount of TIPS gets adjusted to the CPI so that the purchasing power of the investor is not affected due the inflation. Though the coupon rate is constant in the case of TIPS, it still provides an interest amount which is duly multiplied by the inflation-adjusted principal. Thus, it is evident that TIPS protects its investors against inflation.

The US treasuries are considered safe investments. Of all these securities, TIPS are considered the safest treasury securities. The reason is that investors in TIPS get the rate of return duly compensated with the increase in inflation rate. This means the rate of return representing the growth of purchasing power is guaranteed. Due to this feature, it offers a low rate of return to its investors.

The interest payable on TIPS is taxable as per federal income tax laws in the year of receipt of such interest amount. The amount credited as an adjustment against inflation is also taxable every year. This tax treatment projects that the amount generated by this type of security is inversely related to inflation till the security reaches its maturity. In simple terms, when there exists no inflation then the amount generated may be exactly the same as for a normal bond. The investor receives the coupon amount less the taxable amount on the coupon amount. Similarly, where there is inflation the investor receives the coupon amount as per CPI less the taxable amount on the Coupon amount. Here, the investor has to pay an additional tax on the inflation adjusted principal.               


Related Discussions:- Treasury inflation-protected securities or tips

Define in store for banking consolidation, What is in store for banking con...

What is in store for banking consolidation? A: Merger activity is a natural procedure by which companies make themselves more effective and better able to compete for customers

Explain the various source of finance, Explain in detail various sources of...

Explain in detail various sources of finance. Which is the most appropriate one?

Explain learning outcomes of financial management, Explain learning outcome...

Explain learning outcomes of financial management By the end of this subject guide as well as having done the relevant readings and activities you should be able to

Explain the tests of controlor systems based auditing, Tests of controlor s...

Tests of controlor systems based auditing Tests to obtain audit evidence about effective operation of the accounting and internal control systems. It isn't concerned about deta

Cost sheet, A proforma cost sheet of a company provides the following data:...

A proforma cost sheet of a company provides the following data:   RO Cost (per unit)      Raw materials 52

Illustrate the steps of creative accounting, Illustrate the steps of Creati...

Illustrate the steps of Creative accounting Creative accounting include: 1 Timing of transactions. Delaying or hurrying up the despatch of invoices at the yearend to decr

What is acquisition, Acquisition (takeover) or merger A merger is the s...

Acquisition (takeover) or merger A merger is the synergy or combination of two companies which are roughly equal in size by consensus of two organisations. A takeover is where

Standard deviation for every project, AOT limited is considering two mutual...

AOT limited is considering two mutually exclusive projects - cable and satellite.  The possible NPVs for every project and their associated probabilities are as follows: Cable:

Role of Trustee in Pension Fund, Role of Trustee in Pension Fund: Trust...

Role of Trustee in Pension Fund: Trustees are people in control of long-term asset allocation of a pension scheme. Whatever benchmark they set will, as we shall see, influence

Financial Analysis of a company, You are required to choose a company for a...

You are required to choose a company for analysis. This company should be quoted on one of the principal international exchanges. It may be your own company. You should then do the

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd