Not quite.Thanks BirdFood! I probably need to buy one on Monday and work backwards to figure this out.
I know that I'll probably pay $2K for a $1K TIPs.
Wouldn't I get interest on the $2K?
Wouldn't the inflation adjustment start with my purchase price and continue until maturity?
In my scenario, you paid $176 for $100 of original face value and $160 of adjusted principal. You only get interest and adjustments based on the $160, not the $176. That extra $16 is what I'm referring to as the "premium price".
For lower coupon rates, you often get a discount rather than paying a premium price.
For example, there's a January 2030 TIPS with a .125 coupon and a 1221 inflation index. It's selling for $92.17.
So for each 100 of original face value you'd pay 1.221 * 92.17=112. You pay $112 for $100 of original face value and $122 of adjusted principal. That's a $10 discount, compared to the $16 premium for the first TIPS.
HOWEVER--the yield turns out to be lower than your candidate. It's 1.564.
Now, I don't fully understand yield calculation. I suspect that to actually get the higher yield for the higher coupon TIPS, I'd have to invest the coupons into something that pays as well as the TIPS. That feels like a lot of trouble. I prefer to get the lower coupon, the higher discount, and therefore most of my profit at maturity. So if a low-coupon and high-coupon have the same yield, I'll take the low-coupon. When they don't...then I dither.
Statistics: Posted by BirdFood — Sun Aug 25, 2024 7:00 pm — Replies 12 — Views 645