What type of bond is specifically designed to protect against inflation?

Treasury Inflation Protected Securities (TIPS) are a unique type of U.S. government bond that provides protection against inflation. They are specifically designed to adjust their principal value based on changes in the Consumer Price Index (CPI). As inflation rises, the principal amount of TIPS increases, which means that at maturity or during interest payments, investors receive greater returns in real terms. This structure helps preserve the purchasing power of the investment, making TIPS an effective hedge against inflation.

In contrast, other types of bonds such as municipal bonds, convertible bonds, and corporate bonds do not inherently adjust their principal based on inflation. Municipal bonds are issued by local governments and often feature tax benefits but lack built-in inflation protection. Convertible bonds allow bondholders to convert their bonds into a specified number of shares of stock, while corporate bonds are debt securities issued by private companies. While these bonds can offer attractive yields, they do not have mechanisms to directly counteract the effects of inflation on their principal value or interest payments.