Treasury Inflation-Protected Securities (TIPS)

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Chapters in this video

  1. 0:00 Why TIPS exist: inflation eats purchasing power
  2. 1:01 TIPS specs: maturities, minimums, and the CPI-U
  3. 2:30 Fixed coupon times moving principal
  4. 3:48 The deflation floor parachute at maturity
  5. 5:13 Phantom income and the ordinary income trap
  6. 6:36 Rapid-fire exam recap

What this video covers

  • Why the TIPS coupon rate stays fixed while the principal adjusts with the CPI-U, and how that produces a different dollar interest payment each period
  • The TIPS specs you must memorize: 5, 10, and 30-year maturities, $100 minimum and $100 increments, book-entry only, semiannual interest on adjusted principal
  • How rising inflation increases the principal and the dollar interest check, while deflation shrinks both
  • The deflation floor at maturity: investor receives the greater of adjusted principal or original par, and why this protects principal only, not interim interest payments
  • Phantom income: why the annual inflation adjustment is taxed as ordinary income (not capital gains) even though no cash is received until maturity
  • Why TIPS are commonly held in tax-deferred accounts like Individual Retirement Accounts (IRAs) and 401(k)s to sidestep the phantom income problem
  • The TIPS tax split: taxable at the federal level, exempt from state and local tax

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