How TIPS work
TIPS use principal adjustments to combat this loss of purchasing power. These adjustments occur every six months and are calculated from changes in the Consumer Price Index for All Urban Consumers, or CPI-U, a common measure of inflation.
When the CPI-U rises, your TIPS principal is adjusted higher by a factor representing the CPI-U increase. When the CPI-U falls, your TIPS principal is adjusted down in the same fashion.
TIPS are also designed to protect your starting principal. At maturity, you will receive either the inflation-adjusted or original principal, whichever is more. In other words, you will never be repaid less than you spent on your initial investment.
TIPS pay interest every six months. The interest rate is fixed, but the payments will rise or fall when principal adjustments are made. TIPS bonds are available in five-, 10-, or 30-year maturities.