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Treasury Indexed Bonds

There are two main types of U.S. indexed bonds: I bonds which are considered inflation indexed savings bonds; and Treasury Inflation-Protected Securities, known as TIPS.

Series I bonds are said to be indexed to inflation because the interest rate on I bonds is changed twice a year (in May and November), and is composed of a fixed rate and a variable rate. The fixed rate remains stable for the entire life of the bond, and the variable rate is calculated on the basis of the change in the Consumer Price Index for Urban Consumers (CPI-U). The variable rate is twice the CPI-U during each six-month period and changes every six months. The interest rate of I bonds is therefore the fixed rate plus a number that corresponds with double the CPI-U during six months. Every six months the fixed rate amount remains stable and the variable rate fluctuates more or less depending on the state of the economy.

U.S. Treasury I Bonds can be sold any time after five years without penalty, and between one and five years after purchase with a loss of only the last three months of interest.

Series I bonds can be purchased in paper or electronic format. In the past, the Treasury used to limit the total annual purchases by a single individual to as much as $60,000 per calendar year, but new rules recently limited purchases to $5,000 in electronic format, and $5,000 in paper format per calendar year.

Treasury Inflation-Protected Securities, called TIPS, are inflation indexed bonds that are adjusted to the Consumer Price Index (CPI). The TIPS are issued with coupons which represent interest payments, but the amount of interest that each coupon will accrue is variable depending on the CPI. This type of bond protects the bond holder from the effects of inflation. TIPS are issued in terms of five, ten and thirty years. At the end of the term (maturity) if inflation has increased the value of the bond, the investor will receive that amount. However, if the actual value of the bond has dropped due to inflation, the investor will still receive the original face value of the bond when it is redeemed.

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However, if the actual value of the bond has dropped due to inflation, the investor will still receive the original face value of the bond when it is redeemed.

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TIPS are issued in terms of five, ten and thirty years.

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