If inflation rises, the yields for TIPS will: A) fall and their price will rise. B) rise and their price will fall. C) rise and their price will rise. Not hard but a good reminder.
A
jorgeam86 Wrote: ------------------------------------------------------- > A Final Answer?
That’s what I’m going with since investors flock over and bid it up. More specifically, I would say if the increase in inflation is higher than expected, the yields should initially fall before they rise due to re-allocation of funds.
C—using some gut feeling to go against the logic and mark an answer where price rises with yield yield has to rise since its TIPS.
A
To be clear, in the long run I think it would be C since TIPS principal is adjusted but in the short run, yields can actually decrease. It’s happened before.
It’s A. Should hold true in the long run even under extreme inflation events. As TIP will pay back adjusted principal, which continue to bring rates back to nominal breakeven. Credit risk or increased borrowing costs outside of inflation would have to drive rates higher NOT inflation for it not hold. Outside the curriculum however and TIPS have very little backtesting for actual inflation events.
Does the TIPS promise to pay EXACTLY the inflation rate or inflation rate + X%? If it pays exactly the inflation rate, then the yield will fall in increasing inflation rate environment (because everybody will rush to investing in it and as a result the yield will go down due to increase in price). Can someone answer my above question?
Ashwin Wrote: ------------------------------------------------------- > Does the TIPS promise to pay EXACTLY the inflation > rate or inflation rate + X%? > > If it pays exactly the inflation rate, then the > yield will fall in increasing inflation rate > environment (because everybody will rush to > investing in it and as a result the yield will go > down due to increase in price). > > Can someone answer my above question? TIPS has a fixed coupon rate while the principal will change with inflation rate…no more space to memorize anything more for TIPS.
deriv108 Wrote: ------------------------------------------------------- > Ashwin Wrote: > -------------------------------------------------- > ----- > > Does the TIPS promise to pay EXACTLY the > inflation > > rate or inflation rate + X%? > > > > If it pays exactly the inflation rate, then the > > yield will fall in increasing inflation rate > > environment (because everybody will rush to > > investing in it and as a result the yield will > go > > down due to increase in price). > > > > Can someone answer my above question? > > TIPS has a fixed coupon rate while the principal > will change with inflation rate…no more space to > memorize anything more for TIPS. Thanks deriv108, it’s more than enough to remember :). In that case, people flock to TIPS in increasing inflation environment for adjustment to their principle, not for the stated fixed coupon. Since the prices go up, the yield goes down.
A