Question

1. Why would investors be interested in TIPS.

2. Why would the US Treasury issue such a security?

3. What are the advanfages and disadvantages of this security from the investor's point of view?

Answer 1

TIPS: Treasury inflation protected securities is a debt security protected from rise in inflation. Tips is used by investors for diversification, due to its no lock in period, inflation protected as well as the scorce of income.

US Treasury issue such security because so that investors are protected from inflation.

Advantages of TIPS:

1. Inflation protected

2. No default risk

3. Fixed source of income

4. Diversificaiton of portfolio

5. No lock in period

Disadvantages of TIPS:

1. It is linked with interest rate so decrease in interest rate will decrease the return.

2. Return can be negative in case of deflation.