Greeting all. how does one deal with tips(Treasury Inflation Protected Securities) I know I pay taxes on the interest payments but do i pay the principal increase when? when the bond is due? or each year it increases? for info here more info on tips: unlike a traditional government bond, the principal and interest payments on TIPS adjust to track changes in inflation. Specifically, the principal and interest on TIPS are indexed to the CPI-All Urban Consumers (CPI-U) so that increases in consumer prices are directly translated into higher principal and interest payments on TIPS. For example, consider a $1,000 ten-year TIPS note with a 2.5% coupon in an environment of 4% annual inflation. Initially, the interest paid would be 2.5% of $1,000, or $25.00. But the principal on the TIPS note will adjust upward on a daily basis to match the inflation rate, reaching $1,480 (4% per year, compounded annually) at the end of 10 years. Although the coupon rate on the TIPS note will remain fixed at
2.5%, the actual interest payments will also rise as the value of the principal increases; in the tenth year, the annualized interest payment will be 2.5% of the inflation-adjusted principal, or 2.5% of $1,480, which is $37.00. At maturity, the investor who purchased the TIPS note when it was issued for $1,000 will receive the inflation- adjusted principal of $1,480.
thanks all marcus cornelius felix/wuffa/william wheeler