In October 2008

In October 2008, as a hedge against inflation, I purchased a 5 year, $25,000 Treasure Inflation-Protected Security (TIPS) at a discounted price of 89.114 with an interest rate of .625%.  As of last October 2009, its inflation-adjusted value was $25,497.25.  So in 12 months, it has increased in value by $3,188.75 [25,000 - 22,278.50 (25,000 x .89114)] but most due to the discount.  I only bought one because they were new to me as an investment vehicle but I thought that the best way to test out the waters is to get your feet wet. Recently there was a bit in the AICPA's CPE Direct studies (Journal of Accountancy, April - June 2009) that laid out why TIPS could be a reasonable investment in either an inflationary or (not so much) in a deflationary market, the last market not so likely to happen, right? The main selling point to TIPS is that, at maturity, you receive the face amount ($25,000) adjusted (most likely up) twice a year over the term (in my case, 5 yrs x 2 =10 times).  So you can pick up the accrued inflation adjustment for (a particular) TIPS (1.02348 for my TIPS at February 1, 2010) plus interest (you get paid half twice a year). Even if you have deflation (what is the chance of that happening, realistically?) during the full term, you are guaranteed the face amount ($25,000) and some reduced interest. But since I purchased the TIPS at a discounted price, I still would have made money.  But, keep in mind that you will have to pay federal income tax on both the interest and inflation adjustment.

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by Dave Burt, CPA - Dave has held accounting management positions in both public accounting and private industry for such companies as Coldwell Banker and Maytag.

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