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Re: Treasury Bonds, help with basics...
Old 07-06-2005, 02:54 PM   #21
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by Brat
Is there a difference between I-Bonds and I Savings Bonds?

When I look at Treasury Direct it appears that the earnings of I Savings Bonds are taxed when redeemed.
Those are the same things. Contrast i-bonds with TIPS, which don't get the deferred tax treatment but can be bought and sold on the secondary market.
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Re: Treasury Bonds, help with basics...
Old 07-06-2005, 05:34 PM   #22
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Re: Treasury Bonds, help with basics...

Ah, but I Savings Bonds can be redeemed at the bank or through Treasury Direct without a brokers fee. You do loose one quarter's interest if held less than 5 years, however, at today's interest rates that's chump change.*

As I read Treasury Direct the face value is adjusted based on the CPI, plus you earn the fixed interest (currently 3.5%).*

I don't understand what happens on pre-mature redemption to the face value.*
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Re: Treasury Bonds, help with basics...
Old 07-06-2005, 07:51 PM   #23
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Re: Treasury Bonds, help with basics...

For a quick glance at Treasuries and Savings Bonds, see Treasury Direct. Also check out Inflation Protected Securities from the Bond Market Association.

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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 02:59 AM   #24
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by Brat
As I read Treasury Direct the face value is adjusted based on the CPI, plus you earn the fixed interest (currently 3.5%).*

I don't understand what happens on pre-mature redemption to the face value.*
Brat, that description doesn't ring a bell for me. I-bonds are sold at face value. You hold them pretty much like you would hold a bank CD. The fixed rate portion of i-bonds is currently 1.2%, and the variable rate component is based on the last 6-months CPI-U, so the current annualized yield is 4.8% (1.2 fixed + 3.6 CPI-U).

When you cash them in, you get face value + accrued interest - interest penalty if you cash them in before 5 years.

You can download a calculator from the treasury that will keep track of all your savings bonds and accrued interest (they call it the Savings Bond Wizard).

I've maxed-out my i-bond allocation for the last few years and I basically view that stash as my kid's college fund (although she only knows about the few bucks in her piggy bank).

Frankly, TIPS are a better investment than i-bonds if you're looking for long-term inflation protection for the simple reason that they pay a higher yield (term premium). But i-bonds are a nice alternative to bank CDs, especially if you need the tax deferral or educational tax break.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 08:35 AM   #25
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Re: Treasury Bonds, help with basics...

I buy $1000 I-bond each month. Consider it like cash and a safety valve, should my Vanguard Index stuff crash. When the SS checks start coming this month, I will buy I-bonds with them, also. Independence, don't ya know. What was that motto: Safety and frugality, Low cost, LBYM, etc. I've taken paper copies of the bonds and they're stuffed in a security deposit box.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 08:54 AM   #26
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by wabmester
Brat, that description doesn't ring a bell for me.* I-bonds are sold at face value.* *You hold them pretty much like you would hold a bank CD.* *The fixed rate portion of i-bonds is currently 1.2%, and the variable rate component is based on the last 6-months CPI-U, so the current annualized yield is 4.8% (1.2 fixed + 3.6 CPI-U).

When you cash them in, you get face value + accrued interest - interest penalty if you cash them in before 5 years.

You can download a calculator from the treasury that will keep track of all your savings bonds and accrued interest (they call it the Savings Bond Wizard).

I've maxed-out my i-bond allocation for the last few years and I basically view that stash as my kid's college fund (although she only knows about the few bucks in her piggy bank).

Frankly, TIPS are a better investment than i-bonds if you're looking for long-term inflation protection for the simple reason that they pay a higher yield (term premium).* * But i-bonds are a nice alternative to bank CDs, especially if you need the tax deferral or educational tax break.
I might disagree with this a little. Assuming we're talking about taxable accounts here: For those in low tax brackets, the tax drag of the TIPS' coupons + inflation adjustments is not that bad, however for those in higher tax brackets, the I bonds may come out ahead [I attempted to model this in a nofeeboards conversation.] For those still accumulating assets [and possibly in high tax brackets, I bonds may make more sense], while for those ER'd [and possibly in low tax brackets, the TIPS may make more sense].

Also note that with I bonds, reinvestment risk is totally eliminated because the interest is always being reinvested at the real rate, however with TIPS, you have to reinvest all those coupon payments into new TIPS at unknown future real rates [unless you own stripped TIPS]. Granted, if you only plan to hold the TIPS for its duration it doesn't matter what happens to interest rates.

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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 09:22 AM   #27
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Re: Treasury Bonds, help with basics...

One interesting thing to note is that if you own tips in a fund, it looks like they distribute the inflation adjustment as capital gains, at least it looks like vanguards does. I added up the distributions in my head (a bad thing on one cup of coffee at 7am with a squealing infant in lap) and it looks to be around 4.5%.

Given the tax treatment on capital gains, and if you're like me and have some nice capital losses you're still using up from the 2000 debacle, you could end up with a nice 4-5% 'yield' thats got limited tax implications.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 10:48 AM   #28
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Re: Treasury Bonds, help with basics...

The "customer" I have in mind is a brother who is going through a divorce, has moved to an income controled apartment and is not a savy investor. The sale of their home will provide cash. His modest pension consists of SS and RR Tier II annuity which colas at 1/3 SS. The primary goal is to preserve purchasing power. He represents that portion of our population who has just enough to get by if he watches his pennies. The advantage of the I Bond is that it accrues interest which is not income until he cashes them. I want to invest for growth, but that will need to wait until/if he inherits from our Mother.

I need to dig into the details of how the I Bond operates so that I can explain to him how/when value is posted to these Bonds.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 11:13 AM   #29
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by Just not
One interesting thing to note is that if you own tips in a fund, it looks like they distribute the inflation adjustment as capital gains, at least it looks like vanguards does.* I added up the distributions in my head (a bad thing on one cup of coffee at 7am with a squealing infant in lap) and it looks to be around 4.5%.

Given the tax treatment on capital gains, and if you're like me and have some nice capital losses you're still using up from the 2000 debacle, you could end up with a nice 4-5% 'yield' thats got limited tax implications.
I'm pretty sure that the cap gains distributions from VIPSX are from cap gains from selling the TIPS, not from the inflation adjustement. I think that Vanguard does distribute the inflation adjustments of the underlying TIPS bonds, but I don't think these would count as cap gains. At least i hope the IRS isn't aware of this if they are. Might want to call Vanguard about that though.

Looking at VIPSX's distributions, the $0.145 distributed in 12/22/2004 in Total Income, breaks down into $0.067 from coupon payments and $0.078 in inflation adjustement [see Important Information About Vanguard Inflation-Protected Securities Fund Investor Shares Distributions]

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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 11:39 AM   #30
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Re: Treasury Bonds, help with basics...

In looking at the last years distributions from vanguards web site, vipsx has distributed roughly 68c per share over the course of that year. 10c of that is in short and long term gains, so you're probably right that its just bond sales. Looks like they take the inflation adjustments as a nav change rather than a distribution as there arent sufficient dividends and gains paid to accommodate. So my bad.

But if thats true, doesnt that mean that a tips fund garners the inflation adjustment without causing a taxable event in that year the cpi adjustment to principal takes effect as a direct tips holding would cause? Unless you sold the shares of course.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 12:59 PM   #31
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Re: Treasury Bonds, help with basics...

It sounds like VIPSX is better suited for a tax-deferred account than a taxable account no?

Thanks.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 02:53 PM   #32
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Re: Treasury Bonds, help with basics...

If it pays only ~1.5% dividend and not a lot of capital gains, I wouldnt see why it'd be bad in a taxable account...but perhaps theres something about it that I just havent figured out yet. Dont own any. Not planning on buying any.
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 03:31 PM   #33
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by Just not
In looking at the last years distributions from vanguards web site, vipsx has distributed roughly 68c per share over the course of that year.* 10c of that is in short and long term gains, so you're probably right that its just bond sales.* Looks like they take the inflation adjustments as a nav change rather than a distribution as there arent sufficient dividends and gains paid to accommodate.* So my bad.

But if thats true, doesnt that mean that a tips fund garners the inflation adjustment without causing a taxable event in that year the cpi adjustment to principal takes effect as a direct tips holding would cause?* Unless you sold the shares of course.
Perhaps I'm missing where you're seeing that the inflation adjustements are just NAV changes. From the second link above, it looks like roughly half of the dividend distribution for VIPSX has been from the inflation adjustment. With individual TIPS, you don't get paid the inflation adjustment, but you're still taxed on it. With VIPSX you received a portion [or all, I'm not sure] of the inflation adjustment, and you're taxed on it.

btw - I would doubt that bond funds will pay a lot of capital gains, since the return from bonds is mainly from coupon payments. I suppose the problem with holding VIPSX in a taxable account is the same problem with holding any bonds or bonds funds in a taxable account: the majority of the return will come from coupon payments, which will be taxed immediately as ordinary income [so no deferral of return - like with cap gains in tax efficient stock funds/etfs].

I'm not real sure about this one, but one may lose the ability not to pay state taxes on Treasury coupons if one has a fund that holds Treasury bonds in a taxable account. Though, I'm not real sure about the loss if one holds a fund that uses mostly treasury bonds. So, one may want to hold individual TIPS in a taxable account if in a high taxed state - like CA.

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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 03:43 PM   #34
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Re: Treasury Bonds, help with basics...

Well see, I really dont know because I dont own it...but I'm looking at the fund and it says it yields 1.35%...that would be the dividend payouts, yes? The capital gains are pretty miniscule (for some reason the last time I looked at it they looked large...maybe I slipped a decimal point...). CPI and average tips coupons are a lot more than 1.35%, so where else are you getting the $ except in NAV increases?
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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 03:57 PM   #35
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Re: Treasury Bonds, help with basics...

This is from clicking on the yield of 1.39% of VIPSX on Vanguard's website:

Quote:
Important information about the Vanguard® Inflation-Protected Securities Fund

The yield quoted is the real yield, or the yield before adjusting for inflation. The actual yield on the Vanguard Inflation Protected Securities Fund will be a combination of the real yield and an inflation adjustment. A complete estimate of the fund's yield requires that an estimate of future inflation be added to the real yield. Because inflation fluctuates, it cannot be projected into the future precisely enough to be included in the yield quote. The inflation adjustment is based on changes to the Consumer Price Index and can either be positive or negative, based on the change to the CPI. Investors interested in maintaining the purchasing power of their investment should reinvest their dividend distributions.
Also, buy clicking on the hyperlinked "G":

Quote:
G — THIS YIELD DOES NOT INCLUDE INCOME ADJ DUE TO CHANGE IN THE RATE OF INFLATION
So, it appers that the "yield" quoted in just the underlying TIPS coupon payments, based on income earned over the last 30 days [and annualized] or projected for the coming year.

The changes in the NAV should be the undistributed cap gains [LT + ST], and undistributed coupon payments + infl adjustment. It could be very well that VIPSX is not distributing a lot of cap gains because it isn't selling a lot of bonds, and realizing those cap gains.

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Re: Treasury Bonds, help with basics...
Old 07-07-2005, 06:25 PM   #36
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Re: Treasury Bonds, help with basics...

In other words "read the fine print"
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Re: Treasury Bonds, help with basics...
Old 07-08-2005, 12:34 PM   #37
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Re: Treasury Bonds, help with basics...

Well now...after further thought...that would mean the tips fund works quite a bit differently than owning regular tips in that with the fund you DO receive the inflation adjustment as a distribution yearly.

Wonder what a 1099 form for the fund looks like...how the various dividends/distributions are taxed.
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Re: Treasury Bonds, help with basics...
Old 07-08-2005, 12:51 PM   #38
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Re: Treasury Bonds, help with basics...

Quote:
Originally Posted by Just not
Well now...after further thought...that would mean the tips fund works quite a bit differently than owning regular tips in that with the fund you DO receive the inflation adjustment as a distribution yearly.

Wonder what a 1099 form for the fund looks like...how the various dividends/distributions are taxed.
Yes, VIPSX does distribute the TIPS coupons + inflation adjustments [I'm not real sure how distributing the inflation adjustements is done though]. All the coupons have to be distributed to shareholders, but i'm not sure if all the inflation adjustments do, or if all the inflation adjustements are distributed. I suppose since the inflation adjustments are technically income that is taxed yearly, if the fund didn't distribute it the fund would be taxed.* ?? IIRC, Mutual funds are required by law to distribute all income and realized capital gains to shareholders.

I'm pretty sure that all coupons and inflation adjustments are treated as dividends, and taxed as ordinary income [much like ind TIPS].

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Re: Treasury Bonds, help with basics...
Old 07-08-2005, 02:19 PM   #39
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Re: Treasury Bonds, help with basics...

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Originally Posted by ats5g

I'm not real sure about this one, but one may lose the ability not to pay state taxes on Treasury coupons if one has a fund that holds Treasury bonds in a taxable account. Though, I'm not real sure about the loss if one holds a fund that uses mostly treasury bonds. So, one may want to hold individual TIPS in a taxable account if in a high taxed state - like CA.

- Alec
The fund should tell you what percentage of dividend distributions are from US Treasury obligations. I have mostly equity mutual funds that generate a few bucks of US treasury income and I get to deduct it from my state taxes. The calculations probably aren't worth any deduction I might get, since it is just a few bucks.
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Re: Treasury Bonds, help with basics...
Old 07-08-2005, 02:28 PM   #40
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Re: Treasury Bonds, help with basics...

I've owned VIPSX for about 4 years now, and I just looked at my distributions. * All I can tell is that they make quarterly dividend distributions and irregular capital gains distributions (usually in Dec, but this year there was an additional cap gains distribution in March). * *The last dividend was in June, and it was about 2% (usually, it's closer to 1%), which annualizes to 4-8%, so the dividend clearly includes both the real and inflation adjustment components.
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