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Processing TIPS securities is similar to processing of mortgage backed securities. There are several components that have similar properties:
With a TIPS bond, you have a par value, which is the share position of the bond without the inflation adjustment applied. This is similar to the original face component on an MBS.
The ILB Index Ratio is applied to the par value of the bond to account for inflation. This is similar to a paydown factor on an MBS.
The Current ILB Quantity is the inflation-adjusted par value for the security (Par Value * ILB Index Ratio). This is similar to the current face on an MBS.
The Interest Purchased/Sold is calculated using the Current ILB Quantity of the bond, not the Par Value. An MBS is calculated using interest based on the Current Face, not the Original Face.
When processing an ILB trade, the ILB Index Ratio that is used for the calculations is the value for Settlement Date of the trade. An MBS would use the factor based on the settlement date of the transaction.
Process an ILB Buy Scenario
Account TIPDEMO
buys 1,000,000 Par
of ILB CUSIP 9128272M3
with a Trade Date of 1/3/02
with a Settle Date of 1/6/02
at a Price of 100.875.
CUSIP 9128272M3
has a Dated Date CPI value of 158.43548 and the
CPI values from the Variable Rate table include:
177.7 for October 2001
177.4 for November 2001 (three-month trailing values)
When you process the trade and populate the Par value of 1,000,000, as shown in the following figure:
The Current ILB Quantity field (previously named Current TIPS Quantity) is populated with a value of 1,121,290. This is calculated by taking the Par of 1,000,000, and multiplying it by the ILB Index Ratio of 1.12129.
The ILB Index Ratio field (previously named TIPS Index Ratio field) is populated with a value of 1.12129. This is calculated by taking the CPI Value for 1/6/02 (Settlement Date of the trade) of 177.65161, and dividing it by the Dated Date CPI Value of 158.43548.
The following figure shows the Open Inflation Linked Bond Buy panel after you enter the Par Value.
The Interest Purchased is calculated based on the following formula:
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In the following figure, the Open Inflation Linked Buy panel shows numbers from this example.
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