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

Determine the circumstances is a warrant’s value high, Under what circumsta...

Under what circumstances is a warrant’s value high?  Explain. A warrant’s value would be high while the stock prices, time to expiration, and/or expected stock price volatility a

Dual-indexed floaters, In dual indexed floaters the coupon rate is a ...

In dual indexed floaters the coupon rate is a fixed rate plus the difference between two reference rates. Purchasers of these securities typically make an assumpt

Buy side analyst, How to Industry analysis and finally stock picking from B...

How to Industry analysis and finally stock picking from Buy-side perspective

Bonds Valuation, Six years ago . the singleton company sold a 20 year bond ...

Six years ago . the singleton company sold a 20 year bond with a 14% annual coupon rate and a 9% call premium. today, singleton called the bonds. the bonds originally were sold at

Explain the term credit unions, Credit unions Credit unions are non-pro...

Credit unions Credit unions are non-profit institutions jointly organised and owned by their members (depositors). Their main objective is to satisfy the depository and lending

Explain term lenders, Lenders Lenders are concerned to receive payment ...

Lenders Lenders are concerned to receive payment of interest and ultimate re-payment of capital. They don't share in the upside of very successful organisational strategies as

Calculate npv-irr - mirr - payback and discounted payback, Calculate NPV-IR...

Calculate NPV-IRR - MIRR - payback and discounted payback: 1-      Define and explain as well as you can of the following: a-      Goals and objectives of the Corporate Fir

Determine about the call and put option, Determine about the call and put o...

Determine about the call and put option A call/ put option provision allow both issuing company and investor to redeem the bonds at a specified amount before maturity date. Lon

Nature of working capital, Nature of Working Capital: Working Capital ...

Nature of Working Capital: Working Capital Management is concerned with the problems that arise in attempting to organize the Current Assets, the inter-relationship and Curren

Time series analysis, In Time Series Analysis, we try to identify and deter...

In Time Series Analysis, we try to identify and determine the pattern of changes in the data collected over regular intervals of time. The data collected can be at a periodical int

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