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TIPS - Accrued Principle Less than Face Value?
Old 03-09-2009, 01:04 PM   #1
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TIPS - Accrued Principle Less than Face Value?

I always understood the the accrued principle for TIPS was the face value times the CPI adjustment, but that the accrued principle could never fall below the face value. However, when I observe current TIPS prices, such as at the Wall Street Journal, I see that the accrued principle is commonly less than the face value.

I assume that what actually happens is that deflation can in fact reduce the accrued principle to less than face value. However, if the accrued principle is less than the face value at maturity, the bond holder gets back the full face value. However, in the mean time, the bond holder gains interest only on the accrued principle, which in fact may be less than face value. Does anyone know if I got this right?

The information off the US Treasury site indicates my understanding is correct, but I would like someone smarter than me to confirm I understand correctly. Thanks.
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Old 03-09-2009, 01:22 PM   #2
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Yes, but you will either get back the principal AND the accrued interest but NEVER less than you original Principal (invested amount). Invest $100 your will always get AT LEAST the $100 back. If that $100 you get back is actually WORTH the same as the $100 you originally invested is another question.
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Old 03-09-2009, 01:23 PM   #3
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TIPS can be priced below par in the secondary market, but you'll always get at least par if you hold them to maturity.
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Old 03-09-2009, 01:32 PM   #4
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Quote:
Originally Posted by OAG View Post
Yes, but you will either get back the principal AND the accrued interest but NEVER less than you original Principal (invested amount). Invest $100 your will always get AT LEAST the $100 back. If that $100 you get back is actually WORTH the same as the $100 you originally invested is another question.
OAG,

When you say interest, you referring to the CPI adjustment to the original principle, as opposed to the nominal interest (face plus CPI times accrued principle) that is paid semi-annually. Correcty?
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Old 03-09-2009, 01:42 PM   #5
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Yes.
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