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TIPS vs TBILL YTM return
Posted: Tue Jan 24, 2023 1:52 pm
by ebeb
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
by Tom_T
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
by #Cruncher
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]
- See the first two paragraphs of the left sidebar on this help page for an explanation of "Reference CPI" and "index ratios".
- More precisely the 4/15/2023 Reference CPI will be 16/30 of the January CPI plus 14/30 of the February CPI.
- Cell B7 is calculated with the Excel COUPPCD function.
- Index ratios of the TIPS maturing 4/15/2023 are shown on this web page.
- 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
- 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
- Cell B19 uses the Excel YIELD function to confirm the formula used in cell B18.