I have discovered a calculator which compares Internotes inflation-protected bonds with TIPS. It provides a partial answer to the question I have had about how to compare the two.
TIPs have a fixed coupon and adjust the principle amount by the change in the CPI-U. Thus, when the bond matures, you get back your principal adjusted for inflation. Coupon payments rise slowly with the rise in principal amount.
Internotes have a coupon with two parts: a fixed amount (currently 1.62 on the ten year bond) plus the current CPI. Simplifying a bit, if inflation for the year is 3%, then the coupon is 4.62%. When the bond matures, you get back your principal unadjusted for inflation.
This website plots graphs comparing current TIPs rates with current Internotes:
http://www.internotes.com/index.cfm...n&redirect=true&CFID=2160448&CFTOKEN=17844198
Unlike TIPs there is no secondary market for internotes, so you must plan to hold to maturity. Still, it looks like a reasonable alternative for constructing an inflation protected bond ladder. I'm in the process now, and am using both.
Here an article by Bob Arnott published in the Financial Analyst's Journal which furnishes a basis for the laddered approach (matching maturities to anticipated outflows):
http://aimrpubs.org/faj/issues/v60n5/pdf/f0600006a.pdf
I'm currently in the accumulation phase, and the bond ladder is my tool for phasing in fixed income (till last year I was 100% equities). Still probably 10 years from complete retirement, but planning to shift gears in the next few years to a sole proprietor low-stress business which will let me enjoy life a little more.
Sorry for rambling. Comments?
rapoole
TIPs have a fixed coupon and adjust the principle amount by the change in the CPI-U. Thus, when the bond matures, you get back your principal adjusted for inflation. Coupon payments rise slowly with the rise in principal amount.
Internotes have a coupon with two parts: a fixed amount (currently 1.62 on the ten year bond) plus the current CPI. Simplifying a bit, if inflation for the year is 3%, then the coupon is 4.62%. When the bond matures, you get back your principal unadjusted for inflation.
This website plots graphs comparing current TIPs rates with current Internotes:
http://www.internotes.com/index.cfm...n&redirect=true&CFID=2160448&CFTOKEN=17844198
Unlike TIPs there is no secondary market for internotes, so you must plan to hold to maturity. Still, it looks like a reasonable alternative for constructing an inflation protected bond ladder. I'm in the process now, and am using both.
Here an article by Bob Arnott published in the Financial Analyst's Journal which furnishes a basis for the laddered approach (matching maturities to anticipated outflows):
http://aimrpubs.org/faj/issues/v60n5/pdf/f0600006a.pdf
I'm currently in the accumulation phase, and the bond ladder is my tool for phasing in fixed income (till last year I was 100% equities). Still probably 10 years from complete retirement, but planning to shift gears in the next few years to a sole proprietor low-stress business which will let me enjoy life a little more.
Sorry for rambling. Comments?
rapoole