Submitted by tom on
This forum topic should serve as a continuation of the comment on treasury inflation protected securities that is here.
The question is what happens to TIPS when there is deflation rather than inflation.
The asnwer is that principal amount that was invested is adjusted downward based upon the rate of deflation.
As a result, interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same.
There is, however, a safeguard or fallback: at maturity, if the adjusted principal is less than the security's original principal, you are paid the original principal.
More information can be accessed here.
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