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Ted · 07-14-2003, 07:26 AM

A simple fact about bonds in general:

They are not listed on exchanges like stocks are (largely because there are so many more issues; i.e., a company typically has one common stock but may have many separate issues of bonds, as does the U.S. Treasury). However, there is a very active "OTC" market in bonds, and U.S. Treasuries are particularly liquid. All a person needs to do is to deal with a broker, and I would recommend a discount broker who won't try to talk you into buying something that pays them a higher commission than "plain old U.S. Treasuries."

Regarding TIPs in particular:

The thing that matters in deciding whether to purchase TIPs or some other instrument (such as I-Bonds) is the Yield to Maturity (YTM). By law, any broker must tell you what this is on any issue that you are considering. The stated YTM on TIPs DOES NOT INCLUDE ANY INFLATION ADJUSTMENT. That is added at the end of every year, depending on the actual inflation that occurs. So, even though the stated YTM on long-term TIPs is only about 2.5%, the actual return will be that PLUS whatever inflation occurs. So, if inflation for 2003 turns out to be 2%, the par value of the TIPs will be "bumped up" by 2% at the end of 2003, and the total return for 2003 will be 4.5% (plus or minus any changes in market price).

In contrast, the current yield on I-Bonds is typically quoted in a way that INCLUDES the inflation adjustment (which is applied every 6 months). So if the current rate being paid by I-Bonds is 3.5%, it really is not likely to yield as much as TIPs yielding 2.5%. The advantage of I-Bonds is that the tax on their price appreciation is deferred, whereas the interest and inflation adjustment on TIPs is currently taxable unless held in a qualified account.

I think that more people would buy TIPs if they understood them better. But they don"t receive much promotion from brokerage firms because there isn't much commission on them (to the benefit of investors).

07-14-2003, 07:26 AM	#10
Ted Recycles dryer sheets Join Date: Nov 2002 Posts: 398	A simple fact about bonds in general: They are not listed on exchanges like stocks are (largely because there are so many more issues; i.e., a company typically has one common stock but may have many separate issues of bonds, as does the U.S. Treasury). However, there is a very active "OTC" market in bonds, and U.S. Treasuries are particularly liquid. All a person needs to do is to deal with a broker, and I would recommend a discount broker who won't try to talk you into buying something that pays them a higher commission than "plain old U.S. Treasuries." Regarding TIPs in particular: The thing that matters in deciding whether to purchase TIPs or some other instrument (such as I-Bonds) is the Yield to Maturity (YTM). By law, any broker must tell you what this is on any issue that you are considering. The stated YTM on TIPs DOES NOT INCLUDE ANY INFLATION ADJUSTMENT. That is added at the end of every year, depending on the actual inflation that occurs. So, even though the stated YTM on long-term TIPs is only about 2.5%, the actual return will be that PLUS whatever inflation occurs. So, if inflation for 2003 turns out to be 2%, the par value of the TIPs will be "bumped up" by 2% at the end of 2003, and the total return for 2003 will be 4.5% (plus or minus any changes in market price). In contrast, the current yield on I-Bonds is typically quoted in a way that INCLUDES the inflation adjustment (which is applied every 6 months). So if the current rate being paid by I-Bonds is 3.5%, it really is not likely to yield as much as TIPs yielding 2.5%. The advantage of I-Bonds is that the tax on their price appreciation is deferred, whereas the interest and inflation adjustment on TIPs is currently taxable unless held in a qualified account. I think that more people would buy TIPs if they understood them better. But they don"t receive much promotion from brokerage firms because there isn't much commission on them (to the benefit of investors).