6116 - 16.55 - TIPS - FINAL - Paper Finance Tips Teacher Bart Vinck Students Marjolein Duran Fonderson Tataw Ashu Year 2009-2010 Course Finance 2

# 6116 - 16.55 - TIPS - FINAL - Paper Finance Tips Teacher...

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Paper Finance: Tips Teacher: Bart Vinck Students: Marjolein Duran, Fonderson Tataw Ashu Year: 2009-2010 Course: Finance
2 Introduction In this paper, a brief introduction is found about inflation-indexed bonds and specific TIPS. In the first part, an introduction about CPI is given. As CPI is the basis of inflation-indexed bonds and CPI to measure inflation. Because the value of money changes (what you can buy now with an amount might not be what you can be with that amount in 10 years from now), inflation-indexed bonds were created, to protect the investor from inflation and in the hope that inflation stays low, in order to have inflation-indexed bonds cheaper than other bonds when the principal amount is paid. After this, a small introduction in inflation-indexed bonds is given, together with a brief history. Then there is a part that explains TIPS and how TIPS work, this is worked out with an easy example. In the next section, the influence of the crisis on TIPS is described. At the end, a description is given of our Excel tool, made to calculate TIPS in an easy way. What is CPI CPI is the abbreviation of the Consumer Price Index. This is the index used to measure inflation or deflation. The CPI is calculated with two different data, the Price Data and the weight data. The price data is collected from a sample of goods and service in a particular market in question at a particular time period. Meanwhile the weight data is an estimate of the shares of the different types of expenditures, expressed as a fraction of the total expenditure of the index. The per cent age of change between CPI of month T and month T- 1 is a measure estimating inflation or deflation. There are many different CPIs and they are calculated on a monthly, quarterly or yearly bases. The weights are usually related to a composition of expenditure which takes into consideration the time difference between the price reference month and the present month. CPI is used to index wages, salaries, and prices of goods. Marjolein Duran, Fonderson Tataw Ashu Finance: TIPS
3 To construct CPI, we need a price data and weighting data. Price data is normally collected in the number of locations at different times. The weighting data are estimations of how much a specific product takes of the average budget. Inflation protected bonds The big difference between inflation protected bonds and other Treasury issues is that the principal value and interest payments of inflation-indexed bonds increase as inflation increases. This is very different than any other US Treasury. Inflation protected bonds are also issued in Australia, Canada, Sweden, the U.K., … Each of these bonds have a different structure. At the moment, there are two different structures of inflation protected bonds. Both structures are linked to the CPI.

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• Fall '10
• Bart Vinck
• Inflation, United States Department of the Treasury, Consumer price index, Fonderson Tataw Ashu, Marjolein Duran

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