I Bonds versus TIPS: should individual investors prefer one to the other?

Authors

  • Marcelle Arak Department of Finance, University of Colorado at Denver
  • Stuart Rosenstein Department of Finance, East Carolina University

DOI:

https://doi.org/10.61190/fsr.v15i4.4864

Keywords:

Personal income taxes, Options pricing, Investment decisions, Savings bonds

Abstract

Both TIPS and Series I Bonds are adjusted for inflation, offering a real rate and an inflation adjustment. The inflation adjustment is the same on both securities, but the real portion of the interest rate on TIPS is generally much higher. Despite I Bonds' less attractive real rate, they have several features that add to their value. They may be redeemed before maturity, at par value plus accrued interest, eliminating price risk. In addition, taxes may be deferred until redemption. We estimate the value of these two features, and find that they are substantial and could potentially offset the lower real rate of I Bonds.

Downloads

Published

2006-12-31

Issue

Vol. 15 No. 4 (2006): FSR Winter 2006

Section

New Original Submission

License

Copyright (c) 2006 Academy of Financial Services

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.

How to Cite

I Bonds versus TIPS: should individual investors prefer one to the other?. (2006). Financial Services Review, 15(4), 265-280. https://doi.org/10.61190/fsr.v15i4.4864