Economics Bonds Questions Medium
A treasury bond and a treasury inflation-protected security (TIPS) are both types of bonds issued by the U.S. Department of the Treasury, but they differ in terms of their structure and how they provide returns to investors.
A treasury bond is a long-term debt instrument issued by the U.S. government with a maturity period of 10 to 30 years. It pays a fixed interest rate, known as the coupon rate, to investors semi-annually until the bond reaches maturity. At maturity, the bondholder receives the face value of the bond, which is the initial amount invested.
On the other hand, a treasury inflation-protected security (TIPS) is also a long-term bond issued by the U.S. government, but it is specifically designed to protect investors against inflation. Unlike treasury bonds, TIPS have an adjustable principal value that is linked to the Consumer Price Index (CPI), a measure of inflation. The coupon payments on TIPS are also adjusted for inflation, meaning that as inflation rises, both the principal value and coupon payments increase. This ensures that the purchasing power of the investor's initial investment is maintained over time.
In summary, the main difference between a treasury bond and a TIPS lies in how they provide returns to investors. Treasury bonds pay a fixed interest rate and have a fixed principal value, while TIPS adjust both the principal value and coupon payments for inflation, providing investors with protection against rising prices.