Re: Treasury TIPS

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Posted by jim on June 23, 2006 at 13:19:13:

In Reply to: Re: Treasury TIPS posted by Mark on June 22, 2006 at 20:32:47:

: : : : I can not believe I am the first one to hit the problem of how to handle Treasury Inflation Protected Securities (TIPS) for I find nothing on the message board! How should the twice a year inflation adjusted pricipal be treated in FM? It is interested but it is reinvested in the bond. However the number of bond owned does not change just the principal value of the bond. FM won't let me reinvest the increase in the bond principal without a price and number of bonds.

: : : : Help!

: : :
: : : Hi Jim,

: : : Can you give some more information on how you're tracking this before the principal is adjusted? Maybe you can give some examples of what you paid, and how you recorded it, in terms of shares, and pricing. Is this something that has a daily share price that is changing, or are you keeping it at a constant $1? I might be better able to offer some ideas once I understand better.

: : : Thanks,
: : : Mark
: : : --
: : : Fund Manager - Portfolio Management Software

: : Mark,

: : The best view is at the Treasury web site on TIPS:
: : http://www.treasurydirect.gov/indiv/research/articles/news_tips_0704.htm

: : Buy TIPS at 99.50 with a par value of 100 with a 3% coupon on 10/15/
: : On 4/15/ receive $1.50 (.03/2*100) in cash. Because the CPI increased 1.4% in six months the TIPS now has a pricipal value of 101.40 (100*.014+100) The 1.40 is treated as interest income on IRS Form 1040 in the year paid.
: : On 10/15/ the interest payment will be 1.52 (.03/2*101.40) and the pricipal will again changed by the change in the CPI during the six months.

: : Posting the twice a year interst is no problem for FM -- it's the increase in pricipal that has me stumped. Notice also to keep FM's tax reporting in line the incrases of pincipal should be treated as interest in the year posted.

: : thank

:
: Hi Jim,

: Very nice explanation, thank you. How are you recording the principal in the first place? Are you recording A or B:

: A) 1 share at a price of $99.50/share
: B) 99.5 shares at a price of $1/share

: I suspect you are using A, and trying to keep your number of shares fixed at 1, since you have 1 bond in this example. However, you could also think of it like a cash instrument, and record it like B. That way, when the interest increases the principal, you can record a reinvested interest income, and purchase more shares (1.4 more).

: Thanks,
: Mark
: --
: Fund Manager - Portfolio Management Software

Yes I used Method A. I can see where Method B would work just fine - good idea! Will check it out and see if anything unexpected crops up.

Thanks,
Jim

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