Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
ISM Feb interest payment
Old 02-16-2007, 12:09 PM   #1
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
ISM Feb interest payment

My Feb ISM interest payment hit my Vanguard Brokerage Account yesterday. It was the same as January's - $0.087 per share. I was expecting a drop to $0.07 per share, based on the year-over-year October CPI-U numbers.

Oct 2005 CPI-U = 199.2

Oct 2006 CPI-U = 201.8

inflation adjustment = -1 + (201.8 / 199.2) = 0.0131 => 1.31%

interest rate = 2.05% + 1.31% = 3.36%

interest payment = (0.0336 / 12) x PAR = (0.0336 / 12) x $25 = $0.07 per share

Did anyone else notice this? What am I doing wrong?
__________________

__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: ISM Feb interest payment
Old 02-16-2007, 12:14 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: ISM Feb interest payment

I noticed this too. I thought it would be less (or at least different from last month's). It was exactly the same though. I'm at Fidelity.
__________________

__________________
justin is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 12:17 PM   #3
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Feb interest payment

Quote:
Originally Posted by FIRE'd@51
based on the year-over-year October CPI-U numbers.
It's been a while since I looked at the prospectus, but I thought they paid based on YoY CPI changes each month. Why are you looking at Oct data?
__________________
wabmester is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 12:33 PM   #4
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: ISM Feb interest payment

Quote:
Originally Posted by wab
It's been a while since I looked at the prospectus, but I thought they paid based on YoY CPI changes each month. Why are you looking at Oct data?
There is a 3-month lag from the start of the interest-rate period.

http://www.sec.gov/Archives/edgar/da...563_2424b5.htm
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 12:48 PM   #5
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Feb interest payment

Yup, I missed that. Looks like your calculation is correct and they overpaid us. I suspect they'll figure it out eventually.

FWIW, I calculated that if they used the change from Nov 2005 - Oct 2006, it would come out closer to what they paid.
__________________
wabmester is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 12:56 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: ISM Feb interest payment

I feel like we are paying Monopoly and we all just drew the Community Chest card "Bank Error in your favor, collect $150". Although in this instance, I only got an extra $10 or so...

__________________
justin is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 01:04 PM   #7
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Feb interest payment

Yeah, if I did the math right, the overpayment cost them $51,900 in total. So, they'll probably just eat it.
__________________
wabmester is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 01:13 PM   #8
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: ISM Feb interest payment

Quote:
Originally Posted by wab
Yeah, if I did the math right, the overpayment cost them $51,900 in total. So, they'll probably just eat it.
Well, it would be $119,000 if they made the same error in the OSM's.

I bet the short sellers aren't too happy.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 03:00 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: ISM Feb interest payment

Gosh, this board is great! I just noticed the same ISM issue in my Schwab account and was going to post asking if others had noticed it too. But the answer was already here! Super!

On a related subject, I've been thinking about the ISM payout scheme and the fact that it's based on a constant $25 PAR value. Doesn't it seem like that because the real value of the $25 will erode vs. inflation over time, the real value of payouts erodes? That is, the real value of a YOY 3% CPI increment in early years will be more valuable, again in real terms, that a YOY 3% CPI increment in later years?

Or am I just thinking myself into unnecessary confusion?

__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 03:59 PM   #10
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Feb interest payment

Quote:
Originally Posted by youbet
On a related subject, I've been thinking about the ISM payout scheme and the fact that it's based on a constant $25 PAR value. Doesn't it seem like that because the real value of the $25 will erode vs. inflation over time, the real value of payouts erodes? That is, the real value of a YOY 3% CPI increment in early years will be more valuable, again in real terms, that a YOY 3% CPI increment in later years?
I don't think there's much of a difference between having an inflation-adjusted principal (a la TIPS) and reinvesting the inflation component of ISM back into ISM.
__________________
wabmester is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 04:08 PM   #11
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: ISM Feb interest payment

Quote:
Originally Posted by youbet
On a related subject, I've been thinking about the ISM payout scheme and the fact that it's based on a constant $25 PAR value. Doesn't it seem like that because the real value of the $25 will erode vs. inflation over time, the real value of payouts erodes? That is, the real value of a YOY 3% CPI increment in early years will be more valuable, again in real terms, that a YOY 3% CPI increment in later years?
That's an interesting question. Suppose you tried to make the ISM work like a TIPS with the same real rate. To make the example simple, assume the ISM price always stays at 25. Each time you get an interest payment, you would reinvest the inflation component into more shares of ISM. That way your number of shares would increase at the inflation rate, and since the real rate of interest (i.e. the 2.05%) would apply to more shares, your interest payment would also grow with the rate of inflation as well. The ISM would behave just like a TIPS.

__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 04:26 PM   #12
Dryer sheet wannabe
 
Join Date: Oct 2006
Posts: 16
Re: ISM Feb interest payment

I own OSM as well as ISM and the Feb interest payment on OSM was also exactly the same as the Jan payment. Looks like both issues were overpaid by my calculation.
__________________
GOJAGATORS is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 04:30 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: ISM Feb interest payment

Quote:
Originally Posted by wab
I don't think there's much of a difference between having an inflation-adjusted principal (a la TIPS) and reinvesting the inflation component of ISM back into ISM.
Quote:
Originally Posted by FIRE'd@51
That's an interesting question. Suppose you tried to make the ISM work like a TIPS with the same real rate. To make the example simple, assume the ISM price always stays at 25. Each time you get an interest payment, you would reinvest the inflation component into more shares of ISM. That way your number of shares would increase at the inflation rate, and since the real rate of interest (i.e. the 2.05%) would apply to more shares, your interest payment would also grow with the rate of inflation as well. The ISM would behave just like a TIPS.

I was thinking along those lines as well. Currently, I don't need the current monthly cash flow from ISM interest payments and would just as soon see the principal amount grow with inflation instead of seeing my MM acct grow by a few hundred bux a month. Maybe I'll just buy an incremental 100 shares every few months with the accumulated payouts. Too bad there is no automatic investment feature.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 04:36 PM   #14
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: ISM Feb interest payment

Quote:
Originally Posted by youbet
I was thinking along those lines as well. Currently, I don't need the current monthly cash flow from ISM interest payments and would just as soon see the principal amount grow with inflation instead of seeing my MM acct grow by a few hundred bux a month. Maybe I'll just buy an incremental 100 shares every few months with the accumulated payouts. Too bad there is no automatic investment feature.
If you purchased your ISM at a discount to PAR, you have some of that growth built in already, so you could do what you are suggesting and probably keep pace fairly well.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 05:07 PM   #15
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: ISM Feb interest payment


I feel maybe there is a fundamental flaw in the reasoning that ISM provides a
better real return than TIPS - but I stand ready to be corrected.

The bond YTM calculator at:
http://www.moneychimp.com/articles/f.../fmbondytm.htm

gives for ISM a YTM of 3.56% for the current price of roughly $21.60 (assuming a
$25 par, 11 year duration, and 2.05% coupon). By contrast, YTMs for 5-yr TIPS seem
to be in the 2.4-2.5% range.

So ISM is about a point better than TIPS. *But*, what these YTM numbers really
are is the YTM *IF* inflation is zero, and so we assume inflation is addded to these
caculated YTMs and thus the *real* return is about equal to the calculated YTM.

The problem is that for TIPS the principal grows with inflation and thus so do the
interest payment and the principal returned at maturity. But for ISM, the interest
payment is increased by inflation, but the principal is not. The principal at maturity
is $25, regardless of inflation, and this works out to about 1.34% APY on the principal
(with above assumptions) almost certainly considerably lower than inflation.

Does this make any sense ?

__________________
JohnEyles is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 05:18 PM   #16
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Feb interest payment

Quote:
Originally Posted by RustyShackleford
Does this make any sense ?
No.

As has been pointed out, the inflation-adjustment of TIPS is nothing more than the treasury forcing you to reinvest part of your dividends (specifically, the inflation component of the dividend).

As has also been pointed out, you're buying ISM at a discount, which means that the YTM goes up as inflation goes up (since you're getting both the coupon and the inflation adjustment at a discount).

ISM is a good deal.
__________________
wabmester is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 05:31 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: ISM Feb interest payment

Quote:
Originally Posted by RustyShackleford
Does this make any sense ?
Yes.

I understand bonds even less than equities, but ISM's payout scheme vs the TIPS payout scheme has been knawing at me all along. I think it's because I've figured out that the incremental additions to principal in TIPS also increase at a rate equal to nominal plus real interest. ISM's PAR value is always $25, regardless of the level of inflation we see between now and maturity.

Once we go through a period of significant inflation, TIPS provides a permanently increased payout because the principal amount has been increased by CPI. With ISM, if after several years of significant inflation YOY cpi dropped to zero for a year, you'd receive 2.05% of $25. So, prices are higher following years of significant inflation, but your payout is low.

Seems like what you do reinvesting the inflation component of the ISM payouts would be key to offsetting this.

I'm kinda confused, so correct me gently if I'm wrong.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Feb interest payment
Old 02-16-2007, 06:16 PM   #18
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: ISM Feb interest payment

There's another advantage to the ISM structure if you hold the security in a taxable account. In a period of high inflation, the real component of the interest rate in a TIPS may not be large enough to pay the tax due. At least with the ISM structure, the cash flow is always there to pay the tax.
__________________

__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
ISM Questions dm FIRE and Money 20 01-30-2007 01:47 PM
long interest rate Bart523 FIRECalc support 0 08-25-2006 05:07 PM
Where would you put $15,000 now? laurence FIRE and Money 16 05-11-2006 05:29 PM
Do I-Bonds pay compounded interest? zakenjanei FIRE and Money 4 03-23-2005 06:04 PM
HELOC Interest Deductibility Question grumpy Other topics 2 10-25-2004 06:13 PM

 

 
All times are GMT -6. The time now is 07:27 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.