Investments, tenth edition

  Inflation-Protected Treasury Bonds 

 The best place to start building an investment portfolio is at the least risky end of the 

spectrum. Around the world, governments of many countries, including the United States, 

have issued bonds that are linked to an index of the cost of living in order to provide their 

citizens with an effective way to hedge inflation risk. 

 

In the United States inflation-protected Treasury bonds are called TIPS (Treasury 

Inflation-Protected Securities). The principal amount on these bonds is adjusted in propor-

tion to increases in the Consumer Price Index. Therefore, they provide a constant stream 

of income in real (inflation-adjusted) dollars. Yields on TIPS bonds should be interpreted 

as real or inflation-adjusted interest rates. We return to TIPS bonds in more detail in 

Chapter 14.