{"id":7653,"date":"2016-07-13T06:45:45","date_gmt":"2016-07-13T13:45:45","guid":{"rendered":"http:\/\/blog.paladinregistry.com\/?p=7653"},"modified":"2016-07-13T06:45:45","modified_gmt":"2016-07-13T13:45:45","slug":"bonds-go-boom","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/bonds-go-boom\/","title":{"rendered":"Bonds that Go Boom"},"content":{"rendered":"

Let\u2019s talk about bonds!\u00a0 You scarcely hear or read much about bonds.\u00a0 The stock market, especially in recent days with the Brexit, grabs the headlines all the time.\u00a0 Bonds just aren\u2019t glamorous, but they\u2019re an important part of your retirement portfolio. They provide safety, stability and steady interest payments\u2014three things that will help sustain your lifestyle during retirement. One thing, though, that most bonds don\u2019t offer is inflation protection. And, as you well know, the cost of living tends to rise almost yearly. But there is one kind of bond that adjusts for inflation: Treasury Inflation-Protected Securities<\/a><\/span><\/strong> or more commonly referred to as \u201cTIPS.\u201d<\/p>\n

You see, our economy is managed with mild inflation as part of its strategy, with 3% being the target rate.\u00a0 Think about what a new car, your weekly grocery bill and cable TV cost 20 years ago.\u00a0 I guarantee you that just about everything costs more today.\u00a0 A $50 bag of groceries, for instance, now costs $77 because of inflation. TIPS are unique because they are guaranteed to keep pace with inflation as defined by the\u00a0Consumer Price Index<\/a><\/span><\/strong>\u00a0(CPI), offering more security during your retirement.<\/p>\n

To compensate for issue costs, TIPS have two components:\u00a0 the first is the coupon (guaranteed interest rate of the bond) and the second is the inflation premium.\u00a0 To illustrate, if a $1,000 regular government bond was issued with a 3% interest rate, the bondholder will receive a $30 interest payment.\u00a0 However, if there was a 10% rise in the CPI, that bond would have no inflation protection, but TIPS would compensate for the increased cost of living.\u00a0 Now let\u2019s compare the previous bond with a TIPS bond issued with a lower interest rate of 2% and 10% inflation.\u00a0 The TIPS bond holder is given the interest plus a 10% inflation premium which is added to the face value ($1,000) of the bond. So the bond is now valued at $1,100, and the bondholder is paid 2% of that amount or $22 of interest earnings. In this case, the TIPS bondholder out earns the regular bondholder.<\/p>\n

Just like there are no perfect people, there are certainly no perfect investments, and this applies to TIPS as well.\u00a0 Some disadvantages are:<\/p>\n