What does the principal value of TIPS adjust according to?

The principal value of Treasury Inflation-Protected Securities (TIPS) adjusts based on inflation and deflation rates. TIPS are designed specifically to protect investors from the eroding effects of inflation. The principal is increased by the rate of inflation, measured by the Consumer Price Index (CPI), and if there is deflation, the principal value can decrease, but it will never fall below the original face value.

This adjustment provides a safeguard for investors, ensuring that their investment maintains its purchasing power over time. The unique feature of TIPS lies in this automatic adjustment mechanism, making them an attractive option for those looking to hedge against inflation. Thus, the connection between the principal value of TIPS and inflation/deflation rates highlights their key purpose in the financial market.