Originally Posted by GTM
OK lets say hypothetically the CPI remains exactly the same for 5 years. (anyone know what the last data was).
How much would your $10,000 TIP be worth in 5 years.
As you know, TIPS have a fixed interest rate and a variable inflation index.* * Today, the fixed rate is around 2%, and inflation is around 5%.* *TIPS compound twice a year.* *So, if inflation stayed at 5%, your total return on $10,000 should be $14,106 after 5 years.
Reality is different.* *The inflation index is applied to the principal every 6 months, and the fixed rate is then applied to the adjusted principal.* *So, you'll get a variable amount of interest even if inflation stays constant, and then you'll get an inflation-adjusted principal back at maturity.
Edit: another difference between i-bonds and TIPS is that i-bonds automatically compound. With TIPS, the interest is distributed to you, so it's up to you to reinvest it to get the equivalent compounding.