In the Open Inflation Linked Bond panel, you can process buy transactions involving ILB securities. For detailed information, see Book Trades for ILBs.

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:

Current TIPS Quantity * Rate / 2 * Number of Days from Last Coupon / Number of Days in the Accrual Period

Therefore, in this example, the security pays semiannually on 1/15 and 7/15, and accrues on an Actual/ Actual basis, so the Interest Purchased is calculated as:

1,121,290 * .03375 / 2 * 175 / 184 = 17,996.25 = Interest Purchased

The Net Amount on the transaction is calculated using the following formula:

Current TIPS Quantity * Price + Accrued Interest

Therefore, in this example, shown in the following figure, the Net Amount calculates as:

1,121,290 * 1.00875 + 17,996.25 = 1,149,097.54

In the following figure, the Open Inflation Linked Buy panel shows numbers from this example.