TIPS Pricing Is Complex
At the end of my previous post about TIPS, I wrote:
There are many fine details on how TIPS really work.
Just to give you a glance of how complex it really can be, take a look at this thread on the Vanguard Diehards Forum. Al asked if someone can estimate how much a $1,000 TIPS note on auction next Monday will really cost. I took a shot at it. Then Pat Morgan showed me how I was off by 3/10th of a penny. Just when I was content with the correct calculation, Pat posted a link to the Appendix of a 400-page Federal Regulations, with these monster definitions and formula on page 403:
Oh boy! Fortunately we have computers for this kind of stuff. I made a spreadsheet for the calculation. In the end, the spreadsheet showed that my initial quick and dirty calculation was off by about $0.48 per $1,000 bond. Perhaps only a math nerd can truly appreciate the quest for precision.
Software picked, likely related posts:
- TIPS Auction on April 12, 2007
- TIPS Auctions on Jan. 11 and 23, 2007
- TIPS Auction Step By Step: Read the Results
Comments
One Comment on TIPS Pricing Is Complex
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sewall on March 12, 2009 |
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What is puzzling about the above is that the price is set at auction. So what is being calculated here? Who uses this calculation and for what purpose? How do auction prices deviate from this calculated price and why?
(I haven't yet read all the articles to which this post links. If the answers are there, I'll find them in due course.)
Tell me what you're thinking, but please don't spam. See comments moderation policy.
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