TIPS - Treasury Inflation Protected Securities Fundamentals

By Greg Phelps Treasury Inflation Protected Securities (known as TIPS), are inflation indexed bonds issued by the US Government. But what do they really offer you as an investor and how exactly do they work???
First of all, there's a lot of investor angst regarding future inflationary expectations. After all - it's a normal concern with the government deficit exploding to unfathomable proportions on a minute by minute basis (not to mention interest rates overall are at historically low levels, and when rates revert to the statistical mean inflation is a likely counterpart to that occurrence).
TIPS can be purchased direct from the US government through the treasury, a bank, broker or dealer - or most preferably through a low cost index fund such as DFA Inflation Protected Securities (DIPSX). Individual TIPS are purchased according to an auction process, where you can either accept whatever yield is determined at the auction or set a minimum yield you're willing to accept. In the auction method, if your requested yield target isn't met - your purchase request will not be executed.
TIPS come in 5, 10, and 30 year maturities and are bought in increments of $100. The return of principal AND ongoing interest payments depend on the TIPS principal value adjustment for the consumer price index (the CPI which is the most commonly used measure of inflation). The coupon payment however, is a constant and stays the same for the life of the security. This is where TIPS get a little tricky - while the coupon payment remains the same, the TIP itself fluctuates meaning the actual yield you receive will vary.
With the underlying TIPS unit value fluctuating based on the CPI, each coupon payment interest rate fluctuates (fixed dollar payment divided by a fluctuating par value equals a floating interest rate). So while the principal value fluctuates, the interest rate is fixed. This is how the holder is protected from inflationary pressures. If inflation increases, the underlying TIPS par value increases along with it.
As with the majority of US Government debt obligations, TIPS pay their coupon semi-annually. The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).
In what situations would TIPS be a viable option for your investment portfolio? Take for example an expectation of inflationary pressures over the next five years. If you were to invest in a portfolio of TIPS, as inflation occurs the principal value of the TIPS rises to compensate you for the inflationary pressure. Your coupon payment remains the same, but your TIPS principal investment is worth more.
Now let's look at the opposite of inflation - deflationary pressures. Should deflation occur, your principal value would drop. TIPS do have a backstop for deflation however. The TIPS maturity value payment is the greater of $100 per TIPS unit, or the adjusted current value at that time.
Treasury auctions vary by security type and date, and it's challenging to find relevant samples for different types of issue. However here's some real life examples of TIPS and regular 5 year treasury notes for comparison.
In a recent TIPS auction on April 26th, 2010, 5 year TIPS were priced at 99.767648 (or $99.77 per $100 par value TIPS security) with a rate of.50%. On the same day, the 5 year treasury note yield was sitting right at 2.6%. In this case, the regular 5 year treasury note is yielding roughly 5 times as much as the 5 year TIPS. Seems like a lot to give up for some inflation protection doesn't it? The wide disparity in yield is primarily due to investor expectations of inflationary pressure (investors are willing to accept a lower interest rate for the inflation protection).
There is an upside however. Let's look at a similar 5 year TIPS security issued last year on 4/15/2009. It was issued at $100.11 for each $100 TIPS and a rate of 1.25%. At the same time the normal 5 year treasury note yield was at 1.71% - not nearly the spread of the first noted TIPS example. That same treasury note issue today (June 5th, 2010) is indexed at 1.02858 or each TIPS is worth $102.86.
A 5 year treasury note issued on April 30, 2009 (as close as possible to the last TIPS example) priced at 99.691687 ($996.91 per $1,000 maturity par value) and yielded 1.875%. Today through TD Ameritrade where I custody client assets, that same 5 year note is priced at 101.188 ($1,011.88 per $1,000 maturity par value).
The roughly one year old 5 year treasury note has earned a return of the coupon payment (two payments at $9.375 each plus some accrued interest which we're discounting for this example), plus an increase in principal of $14.97 which equates to a 3.37% return. For comparison, the closest issued TIPS issue from April 15, 2009 has garnered a return of two coupon payments (I'm using 10 TIPS to bring this example to parity with the $1,000 par value treasury note) of $6.25, and experienced an increase in value of $27.48 for a comparative return of 3.99%. In this example the TIPS outperforms the treasury note by a reasonable margin.
Granted, these examples aren't perfect, but they're close for illustrative purposes on TIPS calculations and values compared to treasury note calculations and values.
There are downsides to TIPS however - one being taxes. Should the principal value rise with inflation in a given year you're taxed on the growth (which is NOT distributed, it's only on paper) as if it were income. This creates somewhat of a phantom income tax - you don't actually receive the money, but you're taxed as if you did! The upside of this is you establish a new basis in the security and won't be taxed on it again, and in fact if deflation occurs may have a loss to put on your tax return. Of course, don't take my word for it - please consult your tax advisor.
In addition to the tax issue, there's also political risk associated with the US Government (the rules can change - after all the rules change all the time!) in addition to the fact that the government calculates the CPI (who's to say they've got their calculations right, and are they manipulated for other political or economic reasons?).
While TIPS are great for some investors, they're not right for everyone, and certainly not right for an entire (or even a majority of) portfolio. However, should inflation pick up from these historically low levels over the next five years, the TIPS should comparatively do just fine compared to the regular 5 year treasury notes.
With all of the TIPS calculations noted above, still one of the best ways to hedge inflation is with a diversified portfolio of passive investment assets such as Dimensional Fund Advisors (DFA Funds), and other exchange traded funds (ETF's). At Red Rock Wealth Management, our portfolios provide a substantial amount of NON-dollar denominated assets (a great way to hedge against a weak dollar). Client portfolios consist of over 13,000 equity (stock) securities across 41 countries. In addition, many US based companies hold non-dollar assets as well, and the Red Rock Wealth Management portfolio philosophy also holds other tangible assets the government can't "print" - such as gold, oil, and timber.
The point is, through proper investment management your risk associated with inflation can be mitigated substantially through Treasury Inflation Protected Securities AND broad diversification.
Consider adding TIPS to your portfolio for a component of inflation protection, just make sure you fully understand all of the positive AND negative aspects of TIPS!

Greg Phelps is an Financial Advisor & Retirement Planner, and a Fee-Only CERTIFIED FINANCIAL PLANNER (TM) in Las Vegas and Henderson, Nevada. With over 15 years of financial industry experience, Greg is an accomplished financial advisor, author, and speaker. Through his financial consultant positions with two of the largest investment banking firms on Wall Street - Morgan Stanley and Goldman Sachs, as well as serving as the Regional Manager of Wealth Management and National Manager of Fiduciary Advisory Services at the 5th largest accounting firm in the country - RSM McGladrey, he's consistently and ambitiously improved his skill and knowledge in the financial planning field. In addition to creating a Free Mortgage Rate Quotes utility for use by financial advisors with their clients, he strives to deliver exceptional financial planning advice and guidance in all areas relevant to his clients, with a specialty focus in retirement financial planning. Article Source: http://EzineArticles.com/?expert=Greg_Phelps

Why is Your Credit Rating Bad? - Little Known Reasons

By Laura Wolf

It is your responsibility to maintain a appealing credit report and enjoy almost all the advantages of low APR credit and the best credit card offers, but what if you don't even distinguish that you have a bad credit rating? The difference between folks using appealing credit score and bad one is plenty of times only that the at the first instance group regularly checks their credit record.

1. Your partner's credit score affects yours as well. anybody you are living using and has bad credit might affect your credit rating. To retrieve out increasing number of about this aspect refer to the credit help agencies.

2. Lack of credit report. You might be surprised if you have no credit at all, you can still get declined a finance basically because the agency doesn't even trust you, they don't have experience with you handling your credit. It is always useful to use a little credit or interest without receiving any payment overdraft and profits it off in time to make up your credit score.

3. Moving home, or with no chance to being traceable i.e. no bills on your name, not being registered on the voters' role.

4. Defaults in your existing credit. There might be false or misleading information in your credit file, and sometimes agencies have to update the records manually. For example you had some interested incorrect invoice from a company, and you got into a dispute. You were right, they agreed, but the default still makes your credit score bad. Or in a kind of cases lenders fail to details a cleared debt in time, and it could still appear on your credit details.

5. Being end to your credit limit always. If you don't exceed your overdraft or credit card limit, but you are increasing number of than 75% into it most of the time, that might be an aspect that could reduce your credit score. Lenders choose to look into your "reserves" as well, listening to how much credit is available for you at the moment in case you had difficulties paying your new credit.

6. Being self employed does not even tool. Especially if you just started a new business with using no previous history, you might be at risk that your credit score is poor. Self employed many users are actually a risk for companies, as they could go out of the business any time.

7. Shopping around for credit: It is OK to obtain several quotes from lenders, but if you do submit the application online for example (they have to give you a disclosure that they are conducting a credit check) it has to count towards your credit score. Now, I have seen many many of us ruining their credit rating by submitting multiple credit applications, with no chance to knowing that a couple of applications within a short period of time will be expected to make their credit so bad that they lose all the chances to obtain a loan or a new credit card. Be careful with your applications, and all the time look for the small print, if some offer comes through the post if they will be expected to automatically check your credit report or with no chance to.

8. You could have savings but never many many people distinguish that lenders choose to without be able to meet them. As they are without credit products, they will without get included in your report, therefore if you apply for a ten thousand pound loan and have eleven thousand in savings, you can be proven to be still get declined, but I advise you to contact the lender with the details, they could look into your query.

9. Mobile phone contracts, car insurance. You could with no chance to think that these are credits, and you are OK to miss one or two payments, but it is with no chance to the truth. Unless you are paying yearly for the car insurance, it does include an interest, therefore it is credit.

10. You could have a comprehensible credit score but can be proven to be still get declined credit. How is that? Basically lenders will spot your disposable income, and if they spot that the payments on your extra credit might cause difficulties, they can be proven to be still refuse credit.

I advise you to retrieve out if any of the above affairs apply to you by obtaining a for free credit history. It has to not only help you retrieve your credit rating but you might prove potential fraudulent activity on your accounts as well.

Solvemybadcredit is a finance blog that helps people who are currently struggling with bad credit and financial problems. More articles: http://www.solvemybadcredit.co.uk. Article Source: http://EzineArticles.com/?expert=Laura_Wolf

Credit Debt Help - How to Secure a Legitimate Credit Card Debt Relief Program

By Lindsey Engram

Credit cards are very easy to get and to use. Everybody owns several credit cards and use them quite frequently. And why not? It is very easy to get a credit card; you just have to go to the company and fill out a form, sign the contract and come back in a week to pick it up. The problem is not getting a credit card or using in it, the problem is paying back the amount you spent during the month. Most consumers don't even read the contract, but here are specified the internet rates and the penalties that will make a simple loan turn into deep debt. These high interest rates are the reason why so many people are in debt and can't seem to afford to pay it back.

Credit help comes from different direction but not all of them are as helpful as they say. The creditors will try to make you pay the minimum amount each month until you pay off your debt. This is affordable and easy because you pay a fix amount each month that represent just a fraction of your income. Seeing as the payments don't increase, the only thing left is the period, and this will reach decades. Time by which you will pay ten times the amount you borrowed in interest alone. So, this is not a good option and nor is bankruptcy.

The best place to turn when you have credit card debt is debt settlement. You can find legitimate debt relief help with the help of the internet but always be aware of the fake companies that are operating here as well. Never give money in advance or crucial information about your credit card like number or PIN code. To make sure that a company is legit you can check its previous transactions and financial state. This is information available to the general public; you can also see if the company is registered within the Chamber Of Commerce to make sure it is not fake.

Never pay a company before you know it is legit and will provide help. Debt settlement companies don't ask for a large amount of money in advance.

Debt settlement is a legitimate alternative to filing bankruptcy and often makes sense for consumers on the verge of bankruptcy. There are also other debt relief options available so it would be wise to speak with a debt relief specialist to go over your different options. For a free consultation from a debt relief specialist in your area check out the following link: Free Debt Advice. Article Source: http://EzineArticles.com/?expert=Lindsey_Engram

Debt Counseling Services - Finding Popular and Flexible Options For Achieving Debt-Freedom

By Lindsey Engram

If you need to provide your family with a safe and free of debt future, you need to come up with a strategy to clear your debt. How can you decide which strategy is better for your financial situation by your own? You will definitely need to consult an expert before making any decision. You can choose a credit counseling service to make sure that you get the best advice for your kind of debt. Finding debt counseling services can be pretty easy if you know where to look for reliable sources. A good start would be on debt relief forums, people there will be happy to tell you about their experience with credit counseling and the debt counseling companies that they hired.

The good thing about credit counseling is the fact that the whole process is centered on you; you will obtain a personalized debt relief program that will help you get rid of your debt. No matter what type of debt you have and what sum of money you own, you can still opt for debt counseling. Unlike other programs, credit counseling doesn't come with requirements that need to be meet before opting for it; it's a good option for everybody. Actually you can opt for counseling services even if you don't have a lot of debt, but you want to learn a bit about managing your financials.

Between so many relief programs available, debt counseling is overlook. Unfortunately for the people who overlook it, the program is very good and it can really teach you about managing your debt and planning your financials in a very efficient way. The fees for credit counseling services are not as big as for other debt relief methods and the great thing is that debt settlement companies usually offer a financial counseling session for free. You can benefit from that before making your decision on how you are going to pay your debt. If you opt for debt counseling it doesn't mean that you cannot opt for another debt relief option, actually the debt counseling agency will take care of your debt through other debt relief methods. Many agencies make big efforts to get their costumers out of debt, so you can be sure that the decision you made was a good one.

Debt settlement is a legitimate alternative to filing bankruptcy and often makes sense for consumers on the verge of bankruptcy. There are also other debt relief options available so it would be wise to speak with a debt relief specialist to go over your different options. For a free consultation from a debt relief specialist in your area check out the following link: Free Debt Advice Article Source: http://EzineArticles.com/?expert=Lindsey_Engram