anyone know whether the rate of TIPS = inflation rate
and whether nominal bond rate = real interest rate + inflation
So, if the nominal bond is available, then why bother to by the TIPS?
with nominal bond:
Real rate = nominal bond rate - inflation :))
nominal RATE is real rate + inflation
nominal BOND is not inflation adjusted.
Real bond like TIPS is inflation adjusted.
TIPS: Coupon rate is fixed, notional principal changes along with inflation. Nominal Bonds: usually both coupon rate and notional principal are fixed.
TIPS resembles a floating coupon bond as far as the coupon is concerned , but has inflation protection on the principal unlike any bond , whether floating coupon or fixed coupon .
It is useful to pension funds because ( as some beileve) the CPI reflects employment costs and TIPS index to the CPI . So as employment costs rise ( and usually pensions are linked to those costs ) , they are relative protected if they invest in TIPS.
Rate of TIPS = rate of inflation is misleading. The coupon rises with real rate increases, but principal i.e. face value is adjusted to take into account CPI . So it keeps pase with inflation.
The coupon payment for a nominal bond is likely to be a fixed number.
TIPS coupon is based on = fixed rate + inflation.
So if you pegged your liabilities to inflation, you would prefer TIPS.
Just sharing my thoughts.
Yes, the coupon rate of TIPS may be fixed, but its coupon payment is changing along with the inflation.
tulkuu , either coupon is fixed or it varies with inflation. Please decide which . It can’t do both
you had it right before. the principal changes in dollar amounts adjusted for inflation. the coupon remains the same payment dollar figure, and thus the actual rate changes because the principal is changing against inflation.
thanks, prophets.
so guys, what is the difference between the real bond and TIPS?
TIPS is a [specifc] real bond.
OK, thanks for tulkuu
question clear!