The current principal value would be the inflation index multiplied by the $1000 face value. The inflation index is based on the change in the reference CPI since the bond was issued. The coupon payment is that current principal value on the date that the coupon payment is made multiplied by the coupon rate and divided by two. It is not based on "the applicable inflation index ratio(s) during the six month period", I think maybe you are confusing TIPS with I-bonds in that regard?4. I don’t think the phrase “current principal value” is helpful, because (a) the market price (one component of the adjusted price) is always changing; and (b) if you wanted to turn around and immediately sell, you would get a lower market price than you paid due to the bid/ask spread. Moreover, that phrase does not help you address what I think are two more relevant questions, assuming you plan on holding the bonds until maturity: (1) how is interest calculated (addressed in point 5), and (6) what will the bond be worth at maturity (sort of addressed in point 6).
5. how will be interested computed for the period April 15- Oct 15? To answer that question, the market price ($100.3385 at the time you bought and at any time thereafter) is irrelevant. The interest is calculated by multiplying three numbers: (1) the coupon rate of the bond (which is fixed); (2) the $1000 face amount of the bond; and (3) the applicable inflation index ratio(s) during the six month period. In your case, it’s something like the coupon rate * $1,013.31 (using the inflation index ratio above). (And then divide by 2 because interest is paid semi-annually.)
In the case of this TIPS, the coupon payments will be based on the current principal value on each April 15 and October 15. Or you can say they are based on the inflation index but only what it is on, and only on, those exact dates.
What the TIPS would be worth if it matured today is the current principal value. It's determined in the way you say, but it's confusing that you call it an unhelpful term.6. If you plan to hold the bonds until maturity, you can safely ignore what the bonds would be worth if you had to sell them today - ignore the “current principal value.” Other posters here who plan to hold to maturity have more sophisticated methods of valuation, but I use the “TIPS for Dummies” method of asking: what would this bond be worth if it MATURED today? The answer to that question is $1,000 * whatever the inflation index ratio is at the time you are asking the question. That ratio is greater than 1, and it will go up over time as long as inflation remains a positive number.
Another way to calculate it, which may be easier to incorporate and update in a spreadsheet is to use the ratio of the current reference CPI to the reference CPI on the date of issuance. That's how the index ratio is determined, but doing it that way means you only have to update the current reference CPI and then use that for all your TIPS, rather than finding the index ratio for each one.
Statistics: Posted by jeffyscott — Fri Jun 21, 2024 7:17 am — Replies 5 — Views 455