Regarding TIPS there are two possible meanings for "price". Ambiguity about which meaning is intended probably leads to more confusion than any other aspect of TIPS.
- "Unadjusted price" is how much you pay for each $100 of inflation-adjusted principal.
- "Adjusted price" is how much you pay for each $100 of face value.
105.248398 = unadjusted price
0.99261 = index ratio 7/13/2020 (see this TD webpage)
104.470612 = adjusted price = 105.248398 * 0.99261
In this case a purchase of $1,000 face could be described as either I bought $992.61 of TIPS at an unadjusted price of 105.248398 or as I bought $1,000 of TIPS at an adjusted price of 104.470612. Either way I paid $1,044.71 (ignoring accrued interest). An analogy would be a 0.993 pound steak purchased at an (unadjusted) price of $10.52 per pound could also be described as one steak purchased at an (adjusted) price of $10.45 per steak. Either way I paid $10.45.
The unadjusted price is much more useful. (Because of this, that's what I'm referring to if I just use the unqualified term "price".) Here are a couple of ways it's more useful:
- It allows TIPS prices and yields to be computed from each other the same way that prices and yields can be computed from each other for regular non-inflation-indexed bonds. On the contrary there is no way to compute a yield based on the adjusted price until a TIPS has either been sold on the secondary market or redeemed at maturity.
- Two different TIPS can better be compared. For example, there are two TIPS that mature January 15, 2028 but were issued ten years apart. Since they have about the same yields, we can deduce that the 20-year TIPS has a higher (unadjusted) price because it has a higher coupon. Each (unadjusted) price can be determined mathematically from the TIPS' maturity, coupon, and yield. But no meaningful comparison can be made based on the adjusted price. [Yields and asked (unadjusted) prices are from Friday's WSJ TIPS Quotes and the index ratios are for 7/13/2020 from this webpage.]
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Unadj Index Adj Coupon Yield Price Ratio Price ------ ------- --------- ------- ------ 20-year TIPS issued 2008 1.750% -0.844% 120.12500 1.22384 147.01 10-year TIPS issued 2018 0.500% -0.841% 110.40625 1.03943 114.76
- It is for a tiny amount: only $25 million. The next smallest TIPS auctions I'm aware of were for about $5 billion.
- It was in addition to the normal schedule. It's not listed on the Tentative Auction Schedule of U.S. Treasury Securities.
- It wasn't announced until the day of the auction.
- The TIPS will be issued 7/13/2020, the next business day after the auction.
- There were no non-competitive bids.
- I received a private message from tipswatcher that the $25 million auction on Friday was the Treasury conducting a "live small-value contingency auction operation".
- For those interested, here is one way that the (unadjusted) price can be computed from a TIPS yield. The simplest way would be to use the Excel PRICE function but unfortunately it doesn't work with negative yields. Here is an equivalent computation (that does work with negative yields) of the price of the two TIPS maturing January 15, 2028. It uses the Excel COUPDAYS, COUPDAYSNC, COUPNUM, and PV functions. (Note: "Dirty price" includes accrued interest; "Clean price" excludes it.)
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Row Col A Col B Col C Formulas in column B 1 Settlement 07/13/2020 2 Maturity 01/15/2028 3 Interest period days 182 =COUPDAYS( B1,B2,2,1) 4 Days after settlement 2 =COUPDAYSNC(B1,B2,2,1) 5 Number interest pmts 16 =COUPNUM( B1,B2,2,1) 6 Coupon 1.750% 0.500% 7 Yield to maturity (0.844%) (0.841%) 8 Dirty price 121.008 110.659 =100*(-PV(B7/2,$B5-1,B6/2,1,0)+B6/2)/(1+B7/2)^($B4/$B3) 9 Accrued interest 0.865 0.247 =100*(B6/2)*(1-$B4/$B3) 10 Clean price 120.143 110.412 =B8-B9