Real Yield
Real yield is one of the most useful variables for understanding the opportunity cost of holding a non-yielding asset such as gold.
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TIPS Adjust Principal With Inflation, Not the Stated Coupon Rate
TIPS inflation protection works through an inflation-adjusted principal amount while the stated interest rate remains fixed.
What it is
Treasury Inflation-Protected Securities adjust their principal using the Consumer Price Index. The stated interest rate is fixed, but interest payments can change because that fixed rate is applied to an inflation-adjusted principal amount.
Why it matters
Understanding the cash-flow mechanics prevents realized CPI adjustment, the TIPS coupon and the market real yield from being treated as the same variable.
Example
When the index ratio raises the inflation-adjusted principal, applying the same stated coupon rate to the larger principal produces a larger dollar interest payment.
Common mistake
Assuming the TIPS coupon rate itself rises and falls each month with CPI.
What to watch
- TIPS principal
- CPI index ratio
- stated coupon rate
- real yield
- maturity value
Key takeaway
TIPS link inflation to principal; the stated coupon rate stays fixed while dollar payments reflect the adjusted principal.
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Sources
U.S. Treasury
Educational and informational purposes only. Not investment advice.