In my mind, what was $64k in purchasing power in 2021 dollars has become $75k in 2024 dollars. Because of how interest rates have increased, the price of the bond has decreased. So I am able to buy $75k in purchasing power (in 2024 dollars) at a discount of $8k rounded. Said differently I will earn the $8k as a real yield over the course of the next 7 years if I hold to maturity.Price is per $100 of face value. Your purchase cost is calculated as $ par x price/100 x inflation index = 64,000 x 0.8919 x 1.18374 = ~$67,500I'm trying to learn to speak TIPS and could use some input from the experts here.
A couple of weeks ago I bought some of 91282CBF7, maturity date 1/15/2031. I paid about $67,400 (rounded). According to Vanguard this was for a quantity of 64,000. Price was $89.19. Coupon interest rate of .125%.
When I look up the inflation index ratio on Treasury Direct as of yesterday I see 1.18374. If I multiply 64,000 times that index I get somewhere around $75,750.
My questions:
1) I think what I can count on here in January 2031, ignoring any tax implications and also ignoring the small amount of cash flow from the semi annual coupon interest payments, is having the equivalent of $75,750 in purchasing power (in todays dollars). Is that correct?
2) Trying to understand the purchase price of $89.19, which it appears is now trading around $89.02. This seems to be per a quantity of 100? If I take the $75,750 times .8902, I get pretty close to what Vanguard tells me is the current value of $67.400. In my mind the roughly 2% real yield I will be earning if I hold it to maturity will bring me up to the $75,750 in purchasing power, which makes sense to me. I know of course when it matures I won't get $75,750 but instead this will be increasing with inflation over that time period.
Just checking to see if I am catching onto the basic mechanics of how TIPS work.
64,000 x index is inflation adjusted dollars. In 2031 you will have purchasing power equivalent to $64,000 in today's dollars
Do I have the wrong idea?
The way you framed it doesn't seem right to me. Why would I pay $67,500 for $64k in purchasing power in today's dollars? Where would I get my real yield I am expecting of 2% if that were true?
Statistics: Posted by loukycpa — Thu Mar 28, 2024 12:01 pm — Replies 2953 — Views 623530
