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What Are TIPS Bonds: Treasury Inflation-Protected Securities

By Catherine Brock – Updated Dec 18, 2025 at 12:01 AM EST

Key Points

TIPS principal adjusts biannually with CPI-U changes, ensuring inflation protection.
At maturity, TIPS repay higher of adjusted or original principal, securing initial investment.
Interest from TIPS is taxed federally; principal increases are also taxable as income.

Treasury Inflation-Protected Securities, or TIPS, are U.S. government-issued bonds that adjust in value according to inflation trends. Let's explore how TIPS work so you can decide whether this debt security is right for you.

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Person holding notebook labeled TIPS, Treasury Inflation-Protected Securities. — Image source: Getty Images.

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Young, risk-tolerant investors are usually more suited to high-yield savings combined with stock portfolios rather than TIPS. The exception would be the younger investor who expects a cycle of high inflation. A small allocation to TIPS could be a hedge against that scenario. Older and risk-averse investors may want to hold somewhat larger TIPS positions, particularly if concerned about inflation risk.

It is always important, however, to evaluate the opportunity cost of holding TIPS bonds. Inflation protection is a perk that usually requires you to accept a lower yield. Reviewing your investing options could reveal that the yield differential is too high. In other words, you might forgo inflation protection in favor of better yields on other government bonds or even high-yield cash deposits.

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At the end of 2024, six-and-a-half years later, you want to estimate your next interest payment and TIPS principal value. The CPI has risen to 315.49852. Your first step is to calculate the index ratio, which is the current CPI value divided by the original value. In this case, that ratio is 1.25688.

Your current principal value is the index ratio multiplied by the original principal, which equals $1,256.88. That means your next interest payment should be roughly $4.71. In the six-and-a-half years since issuance, inflation protection has added $256.88 to your principal value and $0.96 to your twice-annual interest payments.

The 2018-2024 period did include high inflation in the U.S. Future adjustments over similar timeframes will likely be smaller.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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@catherinejbrock

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