TIPS
By Jude Wallis
TIPS are marketable United States Treasury notes and bonds whose principal is adjusted with the CPI-U. The coupon rate is fixed, but each interest payment is applied to that changing principal.
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Inflation raises adjusted principal. Deflation can lower it between payment dates. At maturity the Treasury pays the greater of adjusted principal or original par. Before maturity, market price still moves when real yields move.
In a taxable account, an upward principal adjustment can be taxable before that added principal is paid in cash.
How TIPS work is the explainer. The TIPS calculator walks a simplified annual path. How Series I bonds work is the nonmarketable comparison.