Monday, April 27, 2015

Here's a good "TIPS"

Treasury Inflation Protected Securities, or TIPS, offer investors a lower coupon rate; however, in exchange, investors receive protection against the negative impact of inflation. Higher inflation leads to a loss in purchasing power, as well as higher interest rates, which reduce bond prices. The inflation protection offered by TIPS offsets these impacts by increasing the face value (called the accrued principal) in line with inflation, meaning that periodic coupon payments rise with inflation, as does the return of principal at maturity. See this Bloomberg article for a discussion of why TIPS are back in favor.

Tuesday, April 7, 2015

ETF Trading

ETFs are designed to track a particular underlying index. As these "baskets" of securities are traded, excessive demand or supply of shares can cause a disparity between the price of the ETF and the underlying value of securities held. However, because of the ability of large institutions to trade directly with the ETF firm to create and redeem shares, arbitrage keeps prices in line. See article here, WSJ.