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TIPS are Treasury Inflation Protected Securities. As with other notes and bonds, holders of TIPS receive periodic interest payments and the return of their principal at the end of the term. What makes TIPS different from normal notes and bonds is that the return is automatically adjusted for inflation. Using the Consumer Price Index (CPI) as a benchmark, each TIPS interest payment is adjusted to reflect changes in the CPI. At the end of the term there is a final adjustment to the principal returned to the TIPS holder.
TIPS are issued by the US Treasury and backed by the full faith and credit of the US government. Because TIPS are regarded as an extremely secure investment, they are popular with investors nearing retirement.
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