In a slodown, inflation is expected to fall further and hence tips would be less useful i think. Will go for C
A. Initial recovery During the initial recovery period inflation is low…like input costs and wages are not increasing as yet. With respect to the earlier question on TIPS, can someone explain if the coupons also rise with inflation, why do yields fall. I am not clear on the yield concept. Thank you!
Yep. A
Your answer: C was incorrect. The correct answer was A) Initial recovery. U.S. Treasury Inflation Protected Securities (TIPS) are protected against increases in inflation. They would be needed the least when inflation is falling. During the initial recovery phase of the business cycle, inflation is falling.
What is the difference between TIPS and regular bonds as to yield changes and price changes across the business cycle ? They seem to have identical movements across the business cycle …is my understanding correct ? I understand that TIPS pay variable coupon compared to regular bonds. Thanks.
coupon RATE does not increase. coupon DOLLARS does increase as the coupon DOLLARS are the rate x the notional amount, and the notional amount increases with inflation real yield is the yield from the coupon rate, nominal yield is the yield based off of coupon dollars that includes the inflation premium
The coupon rate is fixed but to determine the coupon payment take the coupon rate multiplied by adjusted principal. I am thinking that when inflation is higher the coupon payment goes up, but not by as much as the adjusted principal is rising, causing the overall yield to decrease. Is this right? To say how TIPs perform in a given business cycle seems difficult because it requires a lot of assumptions about what inflation and interest rates are doing. But I can tell you this, TIPs certainly weren’t “helpful” during this latest slowdown when they fell by 10%+.
Good questions, Dwight!
heeralm@gmail.com Wrote: ------------------------------------------------------- > A. Initial recovery > > During the initial recovery period inflation is > low…like input costs and wages are not > increasing as yet. > > > With respect to the earlier question on TIPS, can > someone explain if the coupons also rise with > inflation, why do yields fall. I am not clear on > the yield concept. Thank you! Draw yourself the price to yield curve. when price is increasing, what happen to the yield? it moves to the left. Also can be explained by common sense: in a inflationary environment, everybody would want to by TIPS (demand increases), so your return (yield) would be lower. Or you can say they do not have to offer your high yield (return) to entice you to buy them b/c there’s already too much demand.