TIPS - Does your broker display them properly?

[Maurice]

I've noticed my etrade account does not show the inflation adjusted quantity of my TIPS - instead they show the original face amount. Yet the market price, which they show on their site, does take that into account. Thus when they calculate the market price with a simple P*Q calculation, they show it incorrectly.


Does anyone else have this problem? I'd be interested to see either way - if you hold TIPS, could you indicate who your broker is and whether or not they show the inflation-adjusted principle or not?

 

[ziggy29]

I bought TIPS through Schwab, and on the day you first buy them it shows the value in your portfolio as the unadjusted price (without inflation factor), which can make it look like you immediately lost 10-20% on the purchase. But by the next day, it shows up in our portfolio with the inflation factor added back in to the bond value.

 

[Maurice]

Does schwab adjust the quantity monthly to reflect the most recent CPI?

 

[ziggy29]

Does schwab adjust the quantity monthly to reflect the most recent CPI?

I believe they take the current base quote with that day's inflation factor applied (which is declining now).

I'm not sure what you mean by adjusting for "quantity." The number of bonds owned (at $1,000 par per bond) remains constant -- 25 of the 1/2025s and 20 of the 7/2016s in my case.

 

[Maurice]

Right, but the principle changes with the CPI. So take those 2025s for example. The reference CPI at issuance was 188.49677. Te reference CPI for Feb 1 2009 is 212.425. So the index ratio is 1.12694.

Thus the actual principle amount of your 25k face is 28,173.5.

I believe the market price is based on the inflation-adjusted principle. Thus to get the true market value of the bond, you would need to multiply the market price * 28,173.75. NOT market price * 25,000.

At least that's my understanding.

 

[Maurice]

(by the way the data for the 2025s comes from this page:

https://www.treasurydirect.gov/instit/annceresult/tipscpi/2009/tipscpi_912810fr4_022009.htm

 

[Maurice]

At least that's my understanding.

And if its incorrect someone please let me know!

 

[clifp]

I know longer own TIPs but what I did notice is that Schwab often would display the wrong value online. However, the monthly statements were shown correctly, i.e. the CPI factor multiplied by the market price. So ignored the online quotes and would call the bond specialist if I really needed an accurate quote.

 

[FIRE'd@51]

TIPS are quoted without the inflation adjustment. The YTM does not matter whether or not it's included, since each term in the payment stream (i.e. all the interest payments as well as the FV and PV) are multiplied by the index ratio, and therefore, it is a common factor which cancels out.

When I owned these in my Vanguard Brokerage Account, the market price (without the index ratio) was shown on my statement as the current price, but the holdings value included the inflation adjustment (market value times the index ratio), since this is what I would receive if I sold the TIPS.

 

[Maurice]

Some background on how they're priced. It confirms the price is a percentage of inflation-adjusted principal, hence market value should be inflation-adjusted principal * market price/100, hence etrade is doing it wrong.

Buying TIPS On Secondary Market, Part 2: Understand Quotes - The Finance Buff

 

[thefinancebuff]

All brokers I deal with display like that. It's not necessarily wrong, except you can't use V = P * Q.

Quantity = face value you own; does not change
Price = % of principal; inflation-adjusted principal itself is not shown or shown on the detailed page
Value = market value, taking into consideration the index ratio

If you use Quicken, you have to update the price yourself by Price = Value / Quantity * 100.

 

[Lsbcal]

Maurice, I checked my VBS account and the current value was as you stated: current_price X inflation_factor X face_value_of_bonds. I think the price is the closing price which may be a little wiggly at the close.