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Author: KenAtPcs Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: Inflation Numbers Date: 1/19/2006 10:55 AM
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If we keep at this, together we'll finally figure it out.

However, the principal can never go below the original face-value. So, what happens is a deflation adjustment is subtracted from previous inflation adjustments to the principal.

Now, here's a fun question. What happens if the first inflation adjustment on a TIPS is negative? Does this just disappear, since there are no absolute negatives. Or is the negative adjustment retained and subtracted from the first positive adjustment?


These questions are easily answered if you throw out the bolded assumption. The principal CAN go below original face value. I don't have time to find a citation on the TD website to prove I'm correct (which means it is possible I'm wrong), however my understanding is that the value of a TIPS bond CAN go below par. The guarantee is that at maturity, it will be redeemed for par or greater. In the meantime, since the interest payments are based on the current adjusted value, interest payments will be adjusted downward as deflation erodes the current value of the bond.

At any rate, with TIPS we aren't dealing with 6-month periods for the inflation adjustment to principal (I think).

You're absolutely correct about that. I tend to forget about this, even though I periodically go through my TIPS bonds and update their current value in my spreadsheet (using the numbers you found). They need to have the daily adjustments so that the bonds can be accurately valued on the open market (at least, that's one good reason to do it that way).

they now have numbers through February, using December data.

I did NOT know what data they were using; I never did try to figure that out. So they are as up-to-date as possible, since December data was just released. That's good to know, thanks.

Ken
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