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Thanks for all the info!
*But it would seem that a year or two old TIPS with a significantly higher base rate is going to command a higher price on the resale market, right? *So does this all end up in a present-value analysis to try to figure out what a reasonable price would be for a year or two old TIPS? *My natural skepticism says I might be taken to the cleaners on that!
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The difference between the market price of the bond and its par value is what makes the YTM different than the "coupon" yield. *Determining the YTM does involve a present value analysis (It's the same as internal rate of return) but this will be done for you by the financial firm brokering the transaction. *They will also tell you the coupon yield. *I said before that this information must be disclosed by law -- more precisely, it's by NASD regulation.
The thing that is different about TIPs than other bonds is that the par value (which is initially $1,000 as it is for other bonds) is increased every year to account for inflation.
For example, the following information for a TIP maturing 4/32 was quoted in today's Wall Street Journal:
Rate (Coupon rate): 3.375 * *Bid/Asked 115-24/25 *Yield (to maturity): 2.593 * Accrued Principal: 1035
This means that a person could purchase the bond for the "ask" price of 10 times $115 25/32 ($1157.81), plus a commission or mark-up by their broker.
As of this year, the bond's par value has increased from its initial $1,000 to $1,035 (the accrued principal). *This year's interest payment will thus be the coupon rate, 3.375%, times the accrued principal, or $34.93. *Next year, the accrued principal will increase in proportion to this year's inflation, and next year's interest payment will increase proportionately. *
However, if it assumed that there is no further increase in accrued principal (since future inflation is not yet known) then the interest payments would remain at $34.93 per year, and the yield to the bond's maturity in April 2032 would be 2.593% per year.
About the only way that a person could be moderately "taken to the cleaners" would be to deal with a broker that charged the maximum legal mark-up. *Even that would be relatively insignificant if the person held the bonds for an extended period of years.
Or you can invest in a TIPs mutual fund
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