This page describes the relevant elements of TIPS
- I-Bonds are sold through banks/savings and loans
or directly through the Public Treasury website here.
- I-Bonds purchases are limited to $30,000 per year
per person (so a couple can purchase $60,000 per year).
- I-Bonds can be redeemed after 3 (or 6 - I can't
recall) months. There is a 3 month interest penalty for redemptions earlier
than 5 years.
- I-Bonds earn interest for 30 years and the
interest is not paid until redemption. The interest is exempt from state
(but not federal) income taxes.
- I-Bonds earn a fixed percentage above the CPI-U
('U' for Urban). This fixed percentage has been 3.3% to 3.6% in the past and
(as of 12/30/00) is 3.4%. This is changed for new issues each May and
November. Once you buy a bond the fixed rate is unchanged for the life of
- I-Bonds do not pay interest like bonds - value
builds and is paid at redemption.
- Like I-Bonds, TIPS offer an inflation return and
a fixed return above inflation. But the fixed return is paid each 6 months
by check from the government and the inflation portion builds until the bond
matures. But both of these events are taxable even though you don't receive
the inflation portion of the bond as a payment. This is a significant
disadvantage to TIPS held in taxable accounts.
- Unlike I-Bonds there is no such thing as
'redemption' of TIPS. The government will give you their inflation adjusted
value when they mature. If you need their value before maturity you have to
sell them on the open market like other bonds.
- There are a limited number of TIPS issues
available and these have maturity dates of (I'm working from memory right
now) 2002, 2008, 2028 and 2029. You must purchase these on the open market.
- TIPS fixed return is currently in the 3.7% range
but the 'effective fixed return' varies as a function of the market price of
these bonds. Earlier in 2000 the effective fixed return was close to 4.1%.
Although the price is uncertain I would judge the liquidity of TIPS to be
(and to remain) high. Must "bond desks" at brokers should be able
to purchase/sell tips (at a commission cost, of course).