audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
That’s for sure! It seems straightforward on the surface, but it’s quite complex.Not an easy product!
That’s for sure! It seems straightforward on the surface, but it’s quite complex.Not an easy product!
I don't like complex. I had that when I w*rked. I'm retired.That’s for sure! It seems straightforward on the surface, but it’s quite complex.
I think TIPS can be understood at a fairly simple level. Maybe just focus on the maturity date and the real yield to maturity. Digging a little deeper one might want to know a few more things like that the total value is dependent on the inflation factor as it increases over time to maturity.That’s for sure! It seems straightforward on the surface, but it’s quite complex.
Considering the 2.644% in your example above. Is the relevant number what inflation is at maturity? Or is it the cumulative inflation over the course of the life of the TIPS? IOW, are you betting on what inflation is at a point in time (4/15/29), or on the inflation rates between now and 4/15/29?I look at TIPS this way. I chose a 5 year time horizon and found a UST and a TIPS that mature around then.
UST TIPS 912810FH6 matures 4/15/29 3.875% coupon trading at 108.55469 yielding 1.767%
UST 91282CEM9 matures 4/30/29 2.875% coupon trading at 94.07227 yielding 4.411%
The YTM difference implies the market is pricing in an average of 2.644% inflation between now and April 2029. That seems very plausible to me. If I buy the TIPS instead of the Treasury and inflation exceeds 2.644% then I come out ahead, if inflation is less than 2.644% then I would have ben better off with the UST. Pick your poison.
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It is the cumulative inflation. You can look at the inflation factor at time of purchase but this changes as time goes on. At maturity you get back the number of TIPS purchased times the inflation factor.Considering the 2.644% in your example above. Is the relevant number what inflation is at maturity? Or is it the cumulative inflation over the course of the life of the TIPS? IOW, are you betting on what inflation is at a point in time (4/15/29), or on the inflation rates between now and 4/15/29?
Thanks. Like I stated. I’m still trying to understand some of the basics.
Thanks.That’s not right.
For TIPS bought on the secondary market, you can easily pay more than par due to the inflation adjustment. You will get this back, assuming there is no deflation.
For example, if the inflation adjustment is 1.1 and you buy a par 1k TIPS, you’ll pay 1.1k and will receive that amount back if the inflation adjustment stays at 1.1 until maturity. That would be the scenario with no inflation. If there’s inflation, then the inflation adjustment goes up, and the inflation adjustment goes down if there is deflation.
Deflation is the only risk you have if you pay above par, since TIPS will always return a minimum of par at maturity.
Considering the 2.644% in your example above. Is the relevant number what inflation is at maturity? Or is it the cumulative inflation over the course of the life of the TIPS? IOW, are you betting on what inflation is at a point in time (4/15/29), or on the inflation rates between now and 4/15/29?
Thanks. Like I stated. I’m still trying to understand some of the basics.
It is over time... from purchase to maturity. Each period the par value... the principal that you will receive at maturity... increases for inflation for that period plus you get the 2.875% coupon payment in cash.Considering the 2.644% in your example above. Is the relevant number what inflation is at maturity? Or is it the cumulative inflation over the course of the life of the TIPS? IOW, are you betting on what inflation is at a point in time (4/15/29), or on the inflation rates between now and 4/15/29?
Thanks. Like I stated. I’m still trying to understand some of the basics.
You are referring to TIPS held in a taxable account. They are better to hold in a retirement account if you have the space to do so. Then the "phantom income" is not a consideration.Another thing to keep in mind is that you are taxed on both the interest received each year as well as the inflation adjustment each year, as it's reported income, even though you don't receive an actual payment on the inflation adjustment during those years. So, you aren't deferring the income like you are with I-Bonds. And don't forget to claim the accrued interest that was paid at purchase when you are able to as a negative entry on Schedule B to offset interest income from the same TIPS issue.
Yes, I have them in both types, but it only takes one in a taxed account for it to come into play. Hopefully people know which type they have. lol In my case, it resulted in higher MAGI than I would have liked when combined with the CD's and higher interest rates that I later purchased, which was relevant in my case due to ACA costs tied to MAGI income, and I am near a threshold.You are referring to TIPS held in a taxable account. They are better to hold in a retirement account if you have the space to do so. Then the "phantom income" is not a consideration.
I am also no expert and only recently have I ventured into the world of bonds and TIPS.Suppose I buy TIPS on the secondary market and they are listed as a yield to maturity of 2%. The coupon could be some other value like 0.5%. That real 2% yield then does not just come from the coupon, no?
EDIT: I just happened now to be looking up a TIPS maturing in Jan 2030. It was issued in Jan 2020 and has a yield to maturity of 1.94%. The coupon is only 0.125.
P.S. I do not consider myself a TIPS expert and don't mind admitting it. If I make mistakes in posts I want to hear from you. I think humility in these matters is good.![]()
In the example the inflation factor was only 1.03. More typically it is much higher for several years of inflation.Assume you have a TIPS with a face value of $1,000, a coupon rate of 1.5%, a maturity of 10 years, and the current CPI adjustment factor is 1.03.
- Adjusted Principal: $1,000 * 1.03 = $1,030.
- Current Market Price: Suppose it's trading at 101% of the adjusted principal = $1,030 * 1.01 = $1,040.30.
- Calculate Yield:
=YIELD(DATE(2023,1,1), DATE(2033,1,1), 0.015, 104.03, 100, 2, 1)
Per my understanding:QG67PK00, are you forgetting to include the inflation factor for TIPS? That will be key in determining how much your TIPS are worth at maturity. The inflation factor compounds as we move toward TIPS maturity.
I asked ChatGPT how to use the YIELD function to calculate using TIPS. Here is an example it spit out:
In the example the inflation factor was only 1.03. More typically it is much higher for several years of inflation.
Not quite right. Yes you get the coupon which needs to be reinvested at the current rates, but the real reason you invest in TIPS is because you get a REAL rate of return above inflation. If inflation runs 2.5% and the TIPS you buy have a yield to maturity of 2.0% then you should get 4.5% on your investment.
Not a get rich scheme but better then just mere preservation of purchasing power.