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value. These notes and bonds are designed to protect investors from any inflation risk.

Because the principal amount and the interest paid on these are subject to adjustments, there are tax consequences. Each year, the investor will have gross income from not only the interest amount paid, but also the amount that the principal has been adjusted by, if the principal is increased for inflation. If the principal were decreased for inflation, the taxable amount would decrease. Even though the principal isn’t paid until the bond or note matures, current tax law stipulates that the adjustments be taxable for the year in which they occur. Because of this, many advisors believe that these inflation-adjusted securities may be best for tax-qualified plans, such as IRAs, since the annual income isn’t taxed until distributions begin.

For example, the Smiths decide to purchase a 10-year inflation- indexed Treasury note with the face value of $10,000. Its current coupon rate is four percent. Let’s assume that for the year following the Smith’s purchase, inflation is 3.5 percent. At the end of that year, the note’s principal amount would be adjusted to $10,350; the inter- est paid to the Smiths would be based on this new amount, or $414 per year. The principal amount will continue to be adjusted like this for the lifetime of the note. Thus, the corresponding interest rate will also adjust to the new principal amount each year.

Face value = $10,000 Interest = 4% Inflation = 3.5% New face value = $10,000 + 3.5% = $10,350 New interest rate = $10,350 4% = $414 (paid annually) All amounts are hypothetical.

U.S. Savings Bonds There are two types of savings bonds that are currently being issued: the Series EE and Series HH. U.S. savings bonds are registered, non- transferable, and noncallable securities. Because they are nontrans- ferable, they aren’t marketable—you can’t sell them to another party, you can only redeem them. They are also unable to be accepted as collateral for a loan because of this provision.

Series EE bonds are sold in par value amounts of $50 to $10,000, but the purchase price is 50 percent of the face value (i.e., you pur-

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