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Treasury Direct has a good comparison between TIPs and I Bonds:

https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

However, I want to make sure I understand when you can lose principal. With TIPs, you're only able to buy them on the secondary market (if not using Treasury Direct) which means you might have to pay more than face value, and could therefore lose principal if you hold to maturity or need to sell into the market for less than you purchased for. Do I have that correct?

With I Bonds, since you can only buy them on Treasury Direct, you don't pay more than face value. At any time after 1 year, you can get your full principal back with no loss, albeit a small loss of some interest if held less than 5 years. So for example, if someone bought $10,000 worth of I Bonds, they could get their $10,000 back in full after 1 year, just with a 'fee' attached representing some lost interest. But after 1 year, they wouldn't be at risk of getting less than face value based on market conditions, correct?

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    If my understanding's correct, then with I Bonds you can be 'late to the party' on the inflation bandwagon, and still won't have to pay higher market Ask prices Apr 3, 2022 at 7:37
  • In contrast, with a fertilizer stock for example, being late means you pay through the nose Apr 3, 2022 at 7:54
  • When you talk about principal loss, do you mean only the numbers, or the real value? 10000 might be still 10000, but maybe you can only buy two Big Macs from it.
    – Aganju
    Apr 3, 2022 at 18:52

2 Answers 2

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Let's go one at a time through this.

However, I want to make sure I understand when you can lose principal. With TIPs, you're only able to buy them on the secondary market (if not using Treasury Direct)

No. Most major brokerages offer $0 or low cost primary auctions for US treasury bonds. Fidelity offers $0 treasury purchases online. Noncompetitive bidding is available for up to $10,000,000 in bonds.

which means you might have to pay more than face value,

Yes. That characterizes the secondary market. TIPS funds are subject to the same risks.

and could therefore lose principal if you hold to maturity

Maybe, depending on how you purchased the bond. TIPS maturity values are the maximum of the two: initial face value or inflation adjusted face value. If you hold to maturity and buy at auction, you will not lose your principal. Tax treatment of the principal adjustment due to inflation can complicate the calculations. You may lose any premium you paid over face value to acquire the bond.

or need to sell into the market for less than you purchased for. Do I have that correct?

Yes. If you bought in on the secondary market for above the initial principal value, it is possible for depreciation to reduce the adjusted principal value of the bond. You may also lose any premium you paid over face value to acquire the bond.

With I Bonds, since you can only buy them on Treasury Direct, you don't pay more than face value. At any time after 1 year, you can get your full principal back with no loss, albeit a small loss of some interest if held less than 5 years.

Yes. This penalty decreases your effective yield. I bonds have a 0% floor for the interest rate. This may also reduce your effective yield.

So for example, if someone bought $10,000 worth of I Bonds, they could get their $10,000 back in full after 1 year, just with a 'fee' attached representing some lost interest.

Yes, but it will decrease your effective yield. There may also be tax implications with how the penalty is treated. This is not legal advice (IANAL).

But after 1 year, they wouldn't be at risk of getting less than face value based on market conditions, correct?

Yes, you will receive your principal back, plus any accrued interest.

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Here are two fixed income websites where there is frequent discussion about I bonds. There has been a lot of discussion about them recently.

Site 1

Site 2

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  • Generally, bare references to off-site URIs are discouraged, since links break frequently. You should at least summarize the important take-away points.
    – keshlam
    Aug 19, 2023 at 1:01

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