Treasury Inflation-Protected Securities (TIPS) are a form of security offered by the US Treasury that provides investors with protection from inflation. The interest on TIPS is paid every six months, the same as other Treasuries, and the interest rate is fixed. However, interest is earned based on the principal balance, and the principal balance is adjusted for inflation (the Consumer Price Index). So both the interest and the principal will go up with inflation (or down, if there is deflation). TIPS are exempt from state and local taxes, but both the interest and the principal adjustments are subject to federal income tax. TIPS are available in 5, 10 or 20 year terms. Interest is paid until maturity. At maturity the TIPS will pay the original principal or the adjusted principal, whichever is higher. TIPS can be a good hedge against inflation and are among the safest investments, but the return on investment is low. Often investors will use them to provide a bit of balance to their portfolios, so that a portion of the portfolio is in a very safe investment.

Minuses: Smaller return on investment, principal and interest may decrease during a deflationary period

Pluses: Safe, Good Hedge Against Inflation, guaranteed to receive at least the original principal amount back at maturity, even in the event of deflation.

For additional information on TIPS, see
http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm