 |
|
|
July 25, 2002
"Treasury Inflation-Protected Securities (TIPS)"
Host: It has been pretty grim in the market lately. In their search for safety, investors are turning to government securities, the bond market. This week on "The Road To Riches," personal finance expert Jordan Goodman talks about something even better: bonds that adjust for inflation.
For investors who want a safe bet in this rocky market, as well as protection against inflation, it is worth taking a look at TIPS. TIPS stand for Treasury Inflation-Protected Securities, and they are issued like regular T-bills by the U.S. Treasury.
With a regular Treasury bond, you give Uncle Sam $1,000, earn a fixed rate of interest, and get your $1,000 back when the bond matures. With a TIPS bond, your return is pegged to inflation, so you won’t lose purchasing power. So, for example, if inflation rises 5 percent, the value of the TIPS bond will rise by 5 percent, from $1,000 to $1,050. This goes on until the TIPS matures. If inflation went negative, the TIPS bond would fall in value. In return for this inflation-protection feature, you get current interest payments from the TIPS coupon, now about 2 percent. Even these coupons have an advantage, though, because they are paid based on the worth of the bond, so as the bond’s par value grows, the coupon is paid based on a bigger amount. So, in our example above, the 2 percent coupon would be based on $1,050, not $1,000. You can buy TIPS from any broker, or you may want to buy them through TIPS mutual funds. Some of the bigger TIPS funds include Fidelity’s Inflation-Indexed Bond Fund, American Century’s Inflation-Adjusted Bond Fund, the Vanguard Inflation-protected Securities Fund, and the PIMCO Real Return Fund. Right now, there isn't much inflation to worry about, but it couldn't hurt to have this kind of protection -- just in case...
|
Minnesota Public Radio | Search | Comments | © Copyright & Terms of Use | Privacy |