This is the fourth installment in my TIPS auction series. The previous posts in this series were:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Place the Order
After the auction is over, the Treasury Department publishes the official auction results on its website. Click on the PDF link in the “Competitive” column.
The most important number to look for in the PDF is the “High Yield” number. That’s the yield of the TIPS you just bought.
The broker will deduct this much from your account on the Issue Date for each TIPS you ordered:
Adjusted Price * 10 + Adjusted Accrued Interest per $1,000
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The Femmes Frugal says
I’ve never heard of TIPS. Does one of your posts explain the basics?
~Katharine
Harry Sit says
Katharine – This post explains the basics: TIPS: Inflation Linked Bonds. Also read Treasury Inflation Protected Securities on Bogleheads Wiki.
Anant says
Hi Harry,
I recently bought your book “Explore TIPS” & was trying to understand how TIPS are priced at auction by the Treasury. I picked up a sample security: 91282CGW5 which is a recently issued 5 year TIPS.
I plugged the numbers in your spreadsheet for this:
“Issue Date 28-04-2023”
“Maturity Date 28-04-2028”
“Dated Date 15-04-2023”
“Index Ratio 1.00241 ”
“Your Own Estimate ”
“Yield Estimate (i) 1.32%”
“Calculated Fields ”
“Coupon Rate 1.250%”
With the Yield estimate being what was the “High Yield” on this security. All details are from the TD website. I am not sure why the price in the sheet is off from the price of 99.904611 on the website. The main thing that confuses me is this called Unadjusted Price. I tried to calculate this on my own like we would a bond: Plug in coupons & discount them by the yield. 99.66442 is what the website shows but my estimate is coming to be 99.66238. Pretty much the same as your spreadsheet in “Price + Accrued Interest”. Where is this calculation going off?
I realize the point of your book was not to dwell in the roots of math but I am still curious & trying to develop an understanding here.
PS: Your book is amazing. I read the whole thing in like 3 hours today but the math part was bugging me.
Harry Sit says
The spreadsheet shows price + accrued interest, both unadjusted and adjusted.
Price + Accrued Interest = 99.708819. This matches the auction result:
Unadjusted Price = 99.664420
Unadjusted Accrued Interest per $1,000 = $0.44399
99.664420 + 0.44399 / 10 = 997.08819
Adjusted Price + Accrued Interest = 99.949117. This also matches the auction result:
Adjusted Price = 99.904611
Adjusted Accrued Interest per $1,000 = $0.44506
99.904611 + 0.44506 / 10 = 99.949117
Your calculation of 99.66238 is awfully close to 99.664420. You’re talking about a difference of 2 cents on a $1,000 bond or $2 when you buy $100,000. Because you don’t know what the yield will be before the auction, your estimate of the purchase cost before the auction will be off by more than $2 per $100,000 due to your yield estimate not matching the auction result. Any imprecision in your formula can be safely ignored.