Indexed Bonds

Inflation-Indexed Bonds

Are bonds once again a safe investment for widows and orphans?

How might indexed bonds work?

Tax implications of indexed bonds

Are bonds once again a safe investment for widows and orphans?

Wildly changing inflation and interest rates in the 1970s and 1980s made bond investing a dangerous place for those seeking steady income and preservation of capital

But now the US Treasury Department is proposing to issue inflation-indexed bonds

How might indexed bonds work?

These bonds would provide a constant yield of perhaps 3 percent plus increases in principal to compensate for loss in purchasing power due to inflation

Not exactly sure how these proposed bonds will work

Tax implications of indexed bonds

There is one thing that is known about these bonds

The preinflation interest income and the adjustment in principal for inflation both will be taxable

Necessary to maintain equality between existing nonindexed bonds

This could create a cash flow problem

Tax is due on increase in principal

But the increase is a paper increase only

You don't receive the increase in cash unless you sold the bond