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URL:  http://boards.fool.com/tips-short-term-bonds-or-cd-18625755.aspx

Subject:  TIPs, Short-Term Bonds or CD Date:  2/21/2003  10:25 AM
Author:  iamdb Number:  6426 of 35392

Background:
I have $200,000 to allocate to fixed income investments in a taxable account, about 25% of the portfolio. Each year, an inflation-adjusted $20,000 would be moved into a money management fund to supplement income. I'm considering Vanguard's Inflation-Protect Securities (VIPSX) or Short-Term Bond Index (VBISX) Funds. An alternative would be to put part or all of it into a 5-year bond ladder.

Decision factors:
Sensitivity of NAV to interst rate increases; tax consequences.

Question 1:
If interst rates correlate strongly with inflation, will the inflation adjustment feature of TIPs protect against deflated NAV? That is, if return is adjusted for inflation (increasing interest rates), will the NAV remain relatively constant.

Question 2:
VBISX has a higher current yield than VIPSX, but there is no 5-year data for VIPSX. Is there reason to expect a higher yield from VBISX or a 5-year CD ladder?

Question 3:
I assume any interest or dividend earned each year is fully taxable with VIPSX, VBISX, or a CD ladder. Is that assumption correct? That is, there is no tax consideration in the decision.

Thanks for your advice.
db
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