TIPS

[jbaron]

I don't really know how to explain it to you "correctly" but here's how they work:

When you purchase a TIP, the TIP has a price (just like any other bond), a coupon (just like any other bond) and an inflation factor, which is novel.

The inflation factor changes every day, and is published by the federal government.

When you purchase a TIP, your price for the purchase is the price on the bond (say, 101.5) times the amount you are are purchasing (say, $10,000) times the inflation factor - say 1.01. So, in this example, the total price (neglecting Accrued Interest) is $10,000 * 101.5 * 1.01 = $10,251.50.

The coupon payment on a TIP is always the coupon rate of the bond times the face amount times the inflation factor. So, the coupon varies from period to period, usually increasing, but sometimes decreasing (with deflation) in proportion to the inflation factor. In the above example, if the coupon was 2%, the amount paid (for 6 months) would be $10,000 times 1% (for the 6 month period) times 1.01 = $101.

The real, intractible problem is that even though the face amount of the bond that you purchase is $10,000, the "value" of that bond does not just vary as to the price each day - it also varies as to the inflation factor. Sort of like a second price, but sort of not.

I've not figured out what to do with these things yet, but I suspect that my solution - in order to make the reporting correct - will be to adjust the prices within Fund Manager so that the price is really equal to the price times the inflation factor. This is a pain, obviously, especially since I'll need to do it for any period in which I want an accurate report.

Does this make sense? Sort of?

Jeff

[Mark]

Hi Jeff,

Thanks for the explanation, that is helpful. I can see how the inflation factor can complicate things. It seems to me that the purchase amount is straight-forward, and recording interest payments is also straight-forward. Just record the actual amount you received, after the inflation adjustment. The only part that isn't kept accurate is the coupon rate, which is effectively changing versus time. This affects the accrued interest calculations and the Income Schedule scheduled interest payment amounts.

We'll have to give this some thought for ways we can improve support for these in the future.

[Flijfi]

Mark,

Here in Brazil it is very common to have bonds with variable coupons attached to an "inter-bank" interest rate (which is published daily, called CDI) * a certain %; or variable coupon based on minimum interest (called SELIC kike the LIBOR rate) published by the local FED times a certain % (usually >100%) for the specific bond.

The face value of the bonds do not change based on this variable rates.
The point is to calculate the accrued interest, based on this historical rates, since the purchase.
I will appreciate if you can consider this case too as an RFE.

Thanks,

Flijfi

[Mark]

Hi Flijfi,

Thanks for the information. It sounds like there may be several investment instruments that can benefit from variable coupon rate support.

[BradN]

Hi Mark,

I was wondering if there has been any updates regarding TIPS since last Feb.

Thanks,

Brad

[Mark]

Hi Brad,

Sorry, no, we still do not have a variable coupon rate feature...

[quercus]

Just wanted to add another voice in support of this thread.

I think it's a pretty glaring deficiency that Fund Manager can't correctly display the value of a standard type of US Treasury bond - especially now that TIPS have been in existence for 15+ years. Vanguard manages to do it correctly. They follow the US Treasury guideline and display the value of a TIPS bond as "Quantity * Price * Index Ratio". That's also the value that you get when you buy or sell.

It's frustrating that the value of my TIPS in Fund Manager is always significantly less than what I see on Vanguard's website. Plus the discrepancy gets worse every day, since the inflation factor is a bit higher every day.

The index ratios are available in XML format from the US Treasury, a month or two in advance. So it shouldn't be impossible to enhance Fund Manager to handle it, perhaps as part of Price Retrieve. Then just store the "value" correctly, as "quantity * price * ratio". I suppose you'd need to add a checkbox to allow the user to indicate that an investment is a TIPS, and you'd probably also want an Index Ratio column in the Data Register.

It would be a little harder if you decide that you want the historic index ratios going back to when TIPS started in 1997. As far as I know, Treasury only publishes the old data in PDF. But some websites avoid the data entry by *calculating* the index ratios instead. My understanding is that they get the monthly Reference CPI (CPI-U) from the Bureau of Labor Statistics ftp site, then prorate it to get the Reference CPI for each day within the month. Then if you wanted to get the index ratio for May 13, you'd take the May 13 Reference CPI and divide it by the Reference CPI on the "dated date" of the bond. For an extensive example of this approach, you could look at http://eyebonds.info/tips/

One last thing -
Earlier in this thread you described the problem as "variable coupon rate". That's a little misleading. With TIPS, the interest rate is fixed for the life of the bond. But the *principal* is adjusted on a daily basis for inflation. So the interest payments are variable because the principal is changing, not because the coupon rate is changing.

Hope you'll consider fixing TIPS in an upcoming release.

Thanks
Bill

[Mark]

Hi Bill,

Thanks for the feedback, it is appreciated. I agree this would be a nice improvement. This is something we will consider, but the "cost" to implement this with a new "inflation factor" field is rather high. We must weigh the implementation cost versus widespread benefit against other possible improvements we may make. I know the concept seems easy enough, but the idea of value = shares * price is common to all investments and very integrated into the product now. Changing that to value = shares * price * factor has a lot of ramifications throughout the program. Some other solution that somehow records the inflation factor with the price would be a much simpler solution, although not as elegant.

[quercus]

Hmm, something recently changed.

Fund Manager used to be able to reconcile my Vanguard brokerage account without any problem. But sometime within the last couple weeks, the reconcile function started showing a discrepancy in the TIPS share count. Coincidentally, the discrepancy can be accounted for by applying the inflation factor.

Example:
- When I log into vanguard.com, I see 150 shares of the TIP with CUSIP 91282UX6.
- Fund Manager's "Portfolio Value" report also shows that I own 150 shares.
- But the reconcile function says "Fund Manager 150.000000" "Statement 151.316932"
- The index ratio (inflation factor) as of yesterday was 1.00878. Multiplying that by 150 shares gives 151.317, which matches the discrepancy.

Two points

1) It looks like the reconcile screen is currently broken whenever TIPS are in a Vanguard portfolio.

2) Crossing my fingers here - maybe this is related to you guys working on showing accurate TIPS valuations in FM? At least with Vanguard, it looks like you might be able to go with "TIPS value = statement shares * price" instead of the more troublesome "TIPS value = shares * price * inflation factor".

- Bill

[Mark]

Hi Bill,

We haven't changed anything here that I'm aware of. If you do a reconcile, and then go look at your "xmldump.txt" log file, search for INVPOSLIST. What does the section that describe your TIP look like? For example, here is an example of one mutual fund holding:

Code: Select all

- POSMF
   - INVPOS
      - SECID
         - UNIQUEID (922031836)
         - UNIQUEIDTYPE (CUSIP)
      - HELDINACCT (OTHER)
      - POSTYPE (LONG)
      - UNITS (100.000)
      - UNITPRICE (10.73)
      - MKTVAL (1073.00)
      - DTPRICEASOF (20140307160000.000[-5:EST])
      - MEMO (Price as of date based on closing price)
   - REINVDIV (Y)
   - REINVCG (Y)

The log files will be present in the hidden folder:

C:\Users\<username>\AppData\Roaming\Fund Manager

[quercus]

Hi Mark,

Here's the section for the CUSIP I mentioned above. In case it's relevant, I have a handful of different TIPS, and they all recently started showing the same problem.

- POSDEBT
- INVPOS
- SECID
- UNIQUEID (912828UX6)
- UNIQUEIDTYPE (CUSIP)
- HELDINACCT (CASH)
- POSTYPE (LONG)
- UNITS (15131.693170283725)
- UNITPRICE (103.445)
- MKTVAL (15652.98)
- DTPRICEASOF (20140306160000.000[-5:EST])
- MEMO (Price as of date based on closing price)

[Mark]

Hi Bill,

As you can see on the "UNITS" line, Vanguard is reporting 15131.693 shares. This is what FM is going to use to compare against your share balance. If this behavior has changed, it is something new on Vanguard's end.

Since FM doesn't support including the effects of an inflation factor, and Vanguard is reporting your share balance as shares * inflation factor, you might consider recording the increase in inflation factor as a reinvested interest type of distribution. This would increase your share balance, and keep you reconciled with Vanguard. For example:

Day 0:
Shares 100, Price 100, inflation factor 1.0

Day X:
Shares 100, Price 101, inflation factor 1.02
The market value is now 100 * 102 * 1.02 = 10,404.
To get the equivalent shares without an inflation factor, it would be:
10,404 / 101 = 103.0099 shares
So, record a Reinvested interest type of distribution for 3.0099 shares at a price of 101.

[quercus]

Thanks Mark, that’s an interesting idea. I’ve been manually adjusting the price to be price * inflation factor. That’s a bit simpler to calculate, especially if I have to do it frequently. But your approach lets me run the reconcile function, which is also valuable.

Anyway, thanks for confirming that nothing has changed on the FM side.

- Bill