TIPS Price and Yield Calculations

The price of aTIPS comprises its real price plus any accrued interest, both of which are adjusted for inflation by multiplying them times the index ratio for the settlement date. The bond s unadjusted accrued interest, as explained in Chapter 1, is calculated using expression (l4.5). 

EXAMPLE TIPS Coupoti and Rfidfimption Payment Calculation  

Consider a TIPS issued on January 15,1998, with coupon of 3.625 percent and a maturity date of January 15, 2008. The base CPI-U level for the bond is the one registered in October 1997. Say this is 150.30. Assume that the CPI for October 2007, the relevant computing level for the January 2008 cash flows, is 160.5. Using these values, the final coupon payment and principal repayment per 100 face value will be  

The markets use two main yield measures for all index-linked bonds the money, or nominal, yield, and the real yield. Both are varieties of yield to maturity. 

To calculate a money yield for an indexed bond, it is necessary to forecast all its future cash flows. This requires forecasting all the relevant future CPl-U levels. The market convention is to take the latest available CPI reading and assume a constant future inflation rate, usually 2.5 or 5 percent. The first relevant future CPI level is computed using equation (14.7). 

EXAMPLE TIPS Coupon and Redemption Payment Calculation  

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