# 🥔 TIPS

By [Let Them Eat Cake](https://paragraph.com/@ltecake) · 2022-06-21

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**TL,DR: Like a homegrown potato, tips are not subject to fluctuations in market prices**

TIPS / Homegrown Potato

*   protected from fluctuations in market prices
    
*   costs a premium versus traditional potatoes
    

Eatamology

“TIPS” stands for Treasury Inflation Protected Securities, which are issued by the U.S. Treasury and offer protection from the rising cost of products due to inflation. Inflation comes from the Latin “inflatus” which means to blow up.

Financials

If you own a typical fixed coupon rate bond that pays 5% of of principal semi-annually, a period of inflation could instantly decrease the value of those payments. If the principal is $1,000 and the payments are 5% of that principal spread across 2 payments per year, then you are receiving $25 per payment. Maybe that was enough for a nice meal before inflation, but now it barely covers food not to mention tax and tip. TIPS protect against this risk, by adjusting the principal on the bond to match changes in inflation. If inflation increases by 2%, then the principal on your TIPS bond increases by 2% as well, and subsequently the interest payments based on the principal will also rise. Just like a consumer may pay a little extra to create their own supply of potatoes, an investor pays a premium for inflation protection when they buy a TIPS product. With the TIPS product on hand, they are now subject to the risk that inflation does not occur, and they paid for insurance that they didn’t need. In a deflationary or static environment, the consumer did all that work growing their own supply, but could’ve just as easily bought from a stable marketplace.

Nutrition Facts Price: Premium Issue Frequency: bi-weekly Maturity: Medium Interest/Coupon Amount: Low - Medium Coupon Type: Fixed or Floating Yield: Low - Medium Tax Status: Tax Exempt

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*Originally published on [Let Them Eat Cake](https://paragraph.com/@ltecake/tips)*