Page 1 of 1

### TIPS vs TBILL YTM return

Posted: Tue Jan 24, 2023 1:52 pm
Since I don't understand TIPS, I am trying to see if buying this TIPS is better or worse than buying the TBILL:
In schwab.com the TIPS Coupon=0.625% YTM=2.286% while the TBILL Coupon=0% YTM=4.658% and the maturity dates are close. What would be the actual return amount on the maturity date for investing \$1000 in each.

TIPS:
Action Description Coupon Maturity sorting ascending Quote Quantity Price Min Max YTM YTW 1 Accrued
Interest Estimated
CUSIP 9128284H0 Buy US Treasury TIP 0.625% 04/15/2023
9128284H0 0.625 04/15/2023 Ask 25 99.63600 1 1000 2.286 -- 52.490 29,914.150

TBILL:
Action Description Coupon Maturity Quote Quantity Price Min Max YTM sorting decending YTW 1 Accrued
Interest Estimated
CUSIP 912796YV5 Buy US Treasury BILL 04/27/2023
912796YV5 0.000 04/27/2023 Ask 25 98.83945 1 8000 4.658 -- -- 24,709.860 View

### Re: TIPS vs TBILL YTM return

Posted: Tue Jan 24, 2023 2:13 pm
You can't know exactly what you will get back on a TIPS. It depends on inflation. The nominal bond might prove to have been the better investment, or not.

### Re: TIPS vs TBILL YTM return

Posted: Fri Jan 27, 2023 9:11 pm
ebeb wrote: Tue Jan 24, 2023 1:52 pm... I am trying to see if buying this TIPS is better or worse than buying the TBILL: ... the TIPS ... YTM=2.286% while the TBILL ...YTM=4.658% ...
Tom_T wrote: Tue Jan 24, 2023 2:13 pmYou can't know exactly what you will get back on a TIPS. It depends on inflation.
Tom_T is correct. The nominal return of the TIPS will depend on future inflation. Cell C13 in the table below shows that inflation of 0.851% would produce a 4.658% nominal return for the TIPS in the original post, the same as the T-Bill's return. Specifically this means that the "Reference CPI" would need to increase 0.851% from 3/1/2023, the latest date for which we know TIPS "index ratios", until 4/15/2023 when the TIPS matures. [1]

The Ref CPI on 3/1/2023 is the same as the monthly CPI for December 2022. The Ref CPI on 4/15/2023 will be approximately the average of the monthly CPIs for January and February. [2] So in other words, to produce a 4.658% nominal return the average of the January and February CPIs must be about 0.851% higher than the December CPI.

Code: Select all

``````  1                   Col A        Col B      Col C       Col D  Formula in Column B
2              Face value       25,000
3              Settlement    1/25/2023
4                Maturity    4/15/2023
5                  Coupon       0.625%
6                   Price       99.636
7  Interest period starts   10/15/2022                         =COUPPCD(B3,B4,2,1) [3]
8      Days to settlement          102                         =B3-B7
9   Days after settlement           80                         =B4-B3
10    Total days in period          182                         =B4-B7
11       Last Ref CPI date               3/01/2023
12  Index Ratio on 3/01/23                 1.19488 [4]
13    Index Ratio increase                  0.851% <---``````

Code: Select all

`````` 14                               Real \$  Idx Ratio   Indexed \$  [5]
15         Cost on 1/25/23    24,952.78    1.19883   29,914.15  =B2*(B6/100+(B5/2)*(B8/B10))
16     Proceeds on 4/15/23    25,078.13    1.20505   30,220.39  =B2*(1+B5/2)
17               Gain/Loss       125.34                 306.24  =B16-B15
18                   Yield       2.286%                 4.658%  =(B17/B15)*(\$B10/\$B9)*2     [6]
19    Excel YIELD function       2.286%                   n/a   =YIELD(B3,B4,B5,B6,100,2,1) [7]``````
1. See the first two paragraphs of the left sidebar on this help page for an explanation of "Reference CPI" and "index ratios".
2. More precisely the 4/15/2023 Reference CPI will be 16/30 of the January CPI plus 14/30 of the February CPI.
3. Cell B7 is calculated with the Excel COUPPCD function.
4. Index ratios of the TIPS maturing 4/15/2023 are shown on this web page.
5. Cells D15 & D16 equal the Real \$ in column B X the index ratios in column C. The index ratio for row 16 is 0.851% more than the index ratio on 3/1/2023:
1.20505 = 1.19488 * 1.00851
6. The formula that computes the 2.286% real return in cell B18 computes the 4.658% nominal return when copied to cell D18.
2.286% = (125.34 / 24952.78) * (182 / 80) * 2
4.658% = (306.24 / 29914.15) * (182 / 80) * 2
7. Cell B19 uses the Excel YIELD function to confirm the formula used in cell B18.