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.