--- title: Test Your Knowledge on Treasury Inflation Protected Securities (TIPS) Bonds - Doug's Quiz Corner description: Quiz yourself on your knowledge of treasury inflation protected securities (TIPS) and the unique relationship that they have with inflation. 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[< Back to read another post](https://www.letsassemble.com/wealth-management-blog) # Test Your Knowledge on Treasury Inflation Protected Securities (TIPS) Bonds - Doug's Quiz Corner Posted by [ Doug Hutchinson | CFA®, Director of Research and Trading](https://www.letsassemble.com/wealth-management-blog/author/doug-hutchinson) December 15, 2017 - [Tweet](https://twitter.com/share) ### ![Doug's Quiz Corner TIPS.png](https://www.letsassemble.com/hs-fs/hubfs/blog-files/Doug's%20Quiz%20Corner%20TIPS.png?width=404&name=Doug's%20Quiz%20Corner%20TIPS.png)Protecting Principal Against Inflation via TIPS Your friend Karen is concerned about inflation increasing so she purchases $1,000 of a Treasury Inflation Protected Securities (TIPS) bond with a semi-annual coupon payment of 2%. TIPS are unique in that the principal amount ($1,000 in this case) will increase with inflation. For example, if there was 3% inflation over the first six months of the bond, the principal amount would adjust to $1,030 ($1,000 x 1.03 = $1,030). Karen isn't quite certain how the semi-annual coupon payments on TIPS work, so she asks for your help. She thinks inflation will be 2% over the first 6 months of owning the bond and 3.25% for the  six months following. What is the total amount of coupon payments would she get from her TIPS bond over the first year under this scenario? 1. $20 2. $20.53 3. $20.73 4. $20.80 (Answer below...)  ### What are Treasury Inflation Protected Securities (TIPS)?  According to Investopedia **treasury inflation protected securities (TIPS) **refer to a treasury security that is indexed to inflation to protect investors from the negative effects of inflation. TIPS are backed by the U.S. government and their par value rises with inflation - as measured by the Consumer Price Index - while the interest rate remains fixed. Solution: Answer 3 is the correct solution!  The principal amount gets adjusted for inflation every 6 months. The coupon payment will be the coupon rate times the adjusted principal and that number is divided by 2 since coupon payments are made semi-annually. The first coupon payment will be $1,000 x 1.02 = $1,020 x 0.02 = $20.4 / 2 = $10.2 The second coupon payment will be $1,020 x 1.0325 = $1,053.15 x 0.02 = $21.06 / 2 = $10.53 The total amount of coupon payments received in the first year under this scenario will be: $10.2 + $10.53 = $20.73 Karen should consider working with a financial advisor who can help her navigate scenarios such as this.     --- This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. 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All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.     ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Doug Hutchinson", "url" : "https://www.letsassemble.com/wealth-management-blog/author/doug-hutchinson" }, "datePublished" : "2017-12-15T19:30:00.000Z", "headline" : "Test Your Knowledge on Treasury Inflation Protected Securities (TIPS) Bonds - Doug's Quiz Corner", "image" : [ "https://www.letsassemble.com/hubfs/blog-files/Doug%27s%20Quiz%20Corner%20TIPS.png" ], "mainEntityOfPage" : { "@id" : "https://www.letsassemble.com/wealth-management-blog/treasury-inflation-protected-securities-quiz", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.letsassemble.com/hubfs/Assembly/logos/Assembly-Wealth-Logo-Orange-500px.png" }, "name" : "Assembly" } } ```