Also, the fixed-rate coupon also rises in proportion to the increase in principal. The principal is repaid at maturity. TIPS are different from a conventional bond in that the interest that is paid on a normal bond is paid on a fixed principal amount, which is repaid at maturity. TIPS are important to investors because they are the first instrument to provide an efficient hedge against inflation. During periods of high inflation, bondholders and stockholders are hurt from the decline in the purchasing power of their investments.
Real estate provides a hedge against inflation, but it is an inefficient one.
When using real estate as an inflation hedge, it is assumed that land prices rise in lock step with the rate of inflation. This may be the case, but because there is a building cycle that impacts the value of land, land values may perform very differently than overall inflation. Besides their inflation hedging properties, TIPS provide other benefits to investors. Since they are backed by the full faith and credit of the U.S. government, they have no credit risk . Since the U.S. economy and the federal government are so well respected by domestic and international investors, there is virtually no chance of default on these bonds.