Inflation Linked Bonds (ILBs), also known as TIPS, real return bonds, treasury gilts, treasury stocks, and generic inflation indexed bonds and linkers, are debt instruments whose principal and subsequent interest payments are adjusted based on the rise of inflation.
ILBs follow a trailing three month index. They are adjusted based on changes in the CPI-U (consumer price index for all urban consumers) with a three month lag. The actual index used in all calculations is published three months prior, and is referred to as the CPI (consumer price index).
To set up an ILB security, you must first add the CPI index security. That is, the underlying index security used to measure the inflation component of the security. After adding the underlying index, add the security master record for the ILB using the Add Long Term Debt panel. The underlying index is stored with the Underlying Information group of fields on the Add Long Term Debt panel. Every ILB security has a Dated Date CPI. This is the initial value against which all future index calculations are made and it remains constant throughout the life of the security. The system supports different inflationary income calculation methods of ILBs. The ILB Calculation Type identifies which calculation method to use when calculating the Daily CPI and Daily ILB index ratio. You must add the monthly CPI index rates in the Variable Rate table to correctly calculate ILB index ratios as of the settlement date of each transaction. The system requires enough future data to calculate the daily ILB index ratio for each day's earnings. In the case of as of transactions, the system automatically runs earnings up to the post date of the trade. Therefore, you must have CPI index rates in the Variable Rate table to prevent the failure of earnings.
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