The Harvard Management Company and Inflation-Protected Bonds

Topics: Investment, Inflation, Bond Pages: 4 (996 words) Published: October 30, 2012
The Harvard Management Company and Inflation-Protected Bonds 1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon. (b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power. (c)TIPS are simultaneously related to change of inflation rate which means the principal and coupon will adjust instantly to change of inflation rate. TIPS like Regular Treasury bonds respond to changes in interest rate, but unlike Regular Treasury bond, TIPS don’t have an expected inflation in the yield, its yield is related to actual inflation rate. (d)As we mentioned above that Regular Treasury bonds put expected inflation rate into calculation of yield, TIPS chooses actual inflation rate. Consequently, when actual inflation rate is higher than expected inflation rate, IPS outperforms regular Treasury bond. 2(a) if there is an increase in real interest rates, it would significantly reduce the price of TIP just as Regular Treasury bonds. Because when the real interest rates increase, investors tends to invest in something with higher return unless price of bonds decrease to compete with other investment. (b)TIPS are inflation-indexed bonds, so when price of TIPS would increase as long as realized inflation increases. (c)Expected inflation is not going to have any impact on TIPS, Because TIPS are responding to the actual inflation. (d)An increase in inflation risk is not going to increase the price of TIPS as TIPS would adjust price with inflation. (e)Like TIPS, a regular bond will have the same response to changes in real interest rates, but it would not change price according to change in realized...
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