I’m confused by the underlined part. If there is deflation, why must inflation-adjusted principal be less than par?The proceeds at maturity will be at least the inflation-adjusted principal. In the unlikely case of deflation over the period from original issuance to maturity, for which the inflation-adjusted principal would be less than the par amount, the proceeds at maturity will be the par amount.Let’s assume the following:
1. Purchase a TIPS with an advertised positive real YTM (unlike in your example from Oct 2020).
2. Hold to maturity.
3. Let’s also assume the coupon rate is less than the advertised real YTM, so buying at a discount.
Under these conditions, is the investor guaranteed to get back their inflation adjusted principal and get a positive real YTM?
In addition to the maturity proceeds, which will be used to determine the capital gain of a TIPS held in a taxable account, there will also be an interest payment.
The real YTM of a TIPS is based on the (unadjusted) price paid for it. If multiple investors buy the same issue of TIPS and the buys settle on the same date, those who paid a lower price than others will have a higher YTM than the others.
Here’s a hypothetical example:
Par value = 1,000
Index ratio at purchase = 1.5
Inflation-adjusted principal = $1,500
Let’s assume Deflation over the period from purchase to maturity brings the index ratio at maturity down to 1.4. The final inflation-adjusted principal is 1,400, but this is still greater than par value. What am I missing
Statistics: Posted by Bengal — Sat Nov 22, 2025 12:41 am — Replies 202 — Views 5137