Talk:Inflation-indexed bond
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[edit] IPS Calculations?
Does anyone know the factor calculation used for IPS in foreign countries such as Japan, Iceland, or Brasil? the traditional US calculation methodology does not work and I am unable to find the calculation available anywhere in the web or books. Any help would be appreciated.
[edit] Where does the extra principal come from?
Is it a gift from the issuer? 198.49.180.40 22:44, 29 June 2007 (UTC)
- I believe the principal is adjusted to reflect the correct inflation-adjusted coupon rate owed to the bondholder. Finnancier 12:45, 1 July 2007 (UTC)
- But "principal is adjusted" by what means? I sure am not adding to the principal. What if the principal has to be adjusted downward? Is the issuer taking it away from me? 198.49.180.40 00:50, 4 July 2007 (UTC)
- I'm not sure I understand your question. You pay less than par for a zero coupon bond, for example, and the issuer has to "add to the principal" at redemption. If inflation is lower than expected, you are worse off with an inflation-indexed bond. Finnancier 15:46, 4 July 2007 (UTC)
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- Issuers do not issue "zero coupon bonds" at "less than par", for one thing. For another thing, a change in par does not reflect a change in principal, it reflects a change in yield. The couponless bond redeems the same principal at maturity no matter what you paid for it. 198.49.180.40 22:12, 4 July 2007 (UTC)
- The principal is uplifted by the change in inflation index since the bond was issued (subject to any indexation lag). If the level of the index is lower at redemption than at issue (i.e. there has been a period of deflation) then the principal will be adjusted by a factor that is less than 1 and therefore will be lower than par. This holds true unless the bond contains a deflation floor (eg Germany).87.114.64.154 21:48, 4 July 2007 (UTC)
- I just don't understand how the amount of principal can change at all. I paid X units for the bond, so the principal is X. X never changes, in a traditional bond. If the inflation indexed bond changes its yield over time, it should be via changes in interest payments, not a "change in principal". Are you saying that when inflation in the amount of 3% occurs, that the issuer just acts as if the principal is now 1.03X, and pays interest according to this new imaginary figure? Or are you saying that 0.03x comes out of the issuer's pocket, added to my lump of principal, and yields additional inflation-indexed value to me this way? And what happens in a deflationary environment? 198.49.180.40 22:07, 4 July 2007 (UTC)
- I think both kinds of inflation-indexed bond exist. In a deflationary environment, you get smaller coupons than a regular bond. (In fact, you get smaller coupons if inflation is lower than expected, so there is risk involved.) I read somewhere that in a deflationary environment, some bonds will pay the maximum of par and inflation-indexed principal upon redemption. Does this make sense? Finnancier 12:14, 5 July 2007 (UTC)
- I guess so. Soooo... the answer to the original question "Where does the extra principal come from? Is it a gift from the issuer?" seems to be "YES". That I'll be paid back my principal at maturity, along with the amount that the issuer added to it to "keep it real" - which could more than double the nominal redemption value, after 20 years at (let's say) 4% inflation. Am I getting it now? Thanks, 198.49.180.40 20:35, 5 July 2007 (UTC)
- I think both kinds of inflation-indexed bond exist. In a deflationary environment, you get smaller coupons than a regular bond. (In fact, you get smaller coupons if inflation is lower than expected, so there is risk involved.) I read somewhere that in a deflationary environment, some bonds will pay the maximum of par and inflation-indexed principal upon redemption. Does this make sense? Finnancier 12:14, 5 July 2007 (UTC)
- I just don't understand how the amount of principal can change at all. I paid X units for the bond, so the principal is X. X never changes, in a traditional bond. If the inflation indexed bond changes its yield over time, it should be via changes in interest payments, not a "change in principal". Are you saying that when inflation in the amount of 3% occurs, that the issuer just acts as if the principal is now 1.03X, and pays interest according to this new imaginary figure? Or are you saying that 0.03x comes out of the issuer's pocket, added to my lump of principal, and yields additional inflation-indexed value to me this way? And what happens in a deflationary environment? 198.49.180.40 22:07, 4 July 2007 (UTC)
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- Folks, I do appreciate your speaking up. I'm sorry if I'm seeming pushy, I don't intend to argue. I just don't understand the instrument, and can't find any online resources that could help. Meanwhile, the article makes it sound like magic... Thanks if any further explanation can be provided. 198.49.180.40 22:15, 4 July 2007 (UTC)
- See the [official site]. It says "When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater." So, yes, it's a 'gift' from the issuer (at least in this case). Or, to put it in investor terms, it's part of the contract (indenture?) between the bond issuer and the purchaser.--Gregalton 14:37, 3 August 2007 (UTC)
- I'm not sure I understand your question. You pay less than par for a zero coupon bond, for example, and the issuer has to "add to the principal" at redemption. If inflation is lower than expected, you are worse off with an inflation-indexed bond. Finnancier 15:46, 4 July 2007 (UTC)
- But "principal is adjusted" by what means? I sure am not adding to the principal. What if the principal has to be adjusted downward? Is the issuer taking it away from me? 198.49.180.40 00:50, 4 July 2007 (UTC)
[edit] Fair use rationale for Image:Pyat rublei 1997.jpg
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BetacommandBot 11:29, 6 July 2007 (UTC)
[edit] Currently Missing: USA Inflation-Indexed Bond Class "Series I Bonds"
Not all US Inflation-indexed bonds are of the TIPS (Treasury Inflation-Protected Securities) variety. There are also Series I inflation indexed savings bonds, which have some advantages over TIPS bonds; however, they have restrictions, like not being marketable (they can be redeemed at the US Treasury directly), not available to non-USA citizens, and a maximum US$30,000.00 purchase per individual per year. A major advantage, I think, is that the income is not taxed in the USA until the I-Bonds are sold or redeemed. New I-Bonds are held only in electronic form, available through "Treasury Direct" at http://www.treasurydirect.gov —Preceding unsigned comment added by 24.153.221.241 (talk) 07:06, 10 February 2008 (UTC)
