TIPS - What happens if you need to sell them

[modhatter]

Can you sell TIPS prior to maturity? If so, how is the value calculated. Also, same question for I-Bonds.

 

[GTM]

I bonds must be held one year and then can be cashed in with a 3 month interest penalty. If held more than 5 years the 3 month penalty would not appy.
As far as I know just bring it to your bank and they will get the value and credit your bank account.

 

[Brat]

Ah ha, you now see the problem with TIPS.  I-Savings bonds are a bit more flexable.  

From the treasury website:
You can cash Series I bonds after 12 months. When you cash the bonds, you will receive the original investment plus the earnings. However, I Bonds are meant to be longer-term investments. So, if you redeem an I Bond within the first five years, there is a 3-month earnings penalty. For example, if you redeem an I Bond after 18-months, you'll get 15 months of earnings.

The 3-month earnings penalty would be cheaper than transaction costs of TIPS.  

 

[Gone4Good]

Yes, you can sell TIPS prior to maturity like any other treasury security. The price you receive for the bonds will be a market price (the TIPS market is active and liquid). Unlike other treasury securities the face amount of TIPS accretes every year based on the official CPI. Say for example that you bought $100 face amount of tips and one year later CPI was 3%. The face value of your bond would accrete to $103. Assuming that REAL interest rates were the same as when you bought the bond, you should be able to sell your TIPS for $103 (excluding transaction costs). If REAL interest rates went up during the year you would get less than $103 and if REAL interest rates went down you'd get more.