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TIPS calculator and formula

By Jude Wallis

TIPS principal rises with inflation, and the fixed coupon rate applies to that adjusted principal. $1,000 growing at 2 percent for 3 years becomes $1,061.21. A 1 percent coupon on it is $10.61.

Inflation-adjusted principal

$1,061.21

Annual coupon on that principal: $10.61.

Original par
$1,000.00
Adjusted principal
$1,061.21
Annual coupon amount
$10.61
$

Face value before inflation adjustment.

%

Teaching annual inflation applied each year. 2 here means 0.02.

Number of annual inflation steps in this simplified path.

%

Fixed coupon rate applied to adjusted principal. 1 here means 0.01.

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The formula

Pt=P0(1+π)t;coupon=0.01PtP_t = P_0(1+\pi)^t;\quad \text{coupon}=0.01P_t

P0P_0 is original par, π\pi is annual inflation, and tt is years. The teaching coupon is 1 percent of adjusted principal PtP_t.

Inflation changes principal

Multiply principal by 1+π1+\pi once for each year. Starting with $1,000, three 2 percent steps produce $1,061.21. How TIPS work explains the security around this identity.

The coupon uses adjusted principal

The fixed 1 percent coupon rate applies to $1,061.21, so the annual coupon amount is $10.61. The rate stays fixed while the dollar coupon changes with principal.

One inflation step

At 3 percent inflation for 1 year, $1,000 becomes $1,030. The 1 percent coupon amount is then $10.30. I bonds against TIPS compares two inflation linked structures.

Scope of the identity

This teaching path applies one annual inflation rate and a 1 percent coupon. Market price, tax and deflation rules are separate from this principal identity. This is educational material, not financial advice.

Worked examples

\$1,000 at 2 percent for 3 years

Original par is $1,000, annual inflation is 2 percent, and the term is 3 years. What are adjusted principal and the 1 percent coupon amount?

  1. Compound principal: 1000(1.02)3=1061.2081000(1.02)^3 = 1061.208, which rounds to $1,061.21.
  2. Apply the 1 percent coupon: 1061.208(0.01)=10.612081061.208(0.01) = 10.61208, which rounds to $10.61.

Adjusted principal is $1,061.21 and the annual coupon amount is $10.61 from $1,000 at 0.02 inflation for 3 years.

\$1,000 at 3 percent for 1 year

Original par is $1,000, annual inflation is 3 percent, and the term is 1 year. What are adjusted principal and the 1 percent coupon amount?

  1. Adjust principal once: 1000(1.03)=10301000(1.03) = 1030, so $1,030.
  2. Apply the 1 percent coupon: 1030(0.01)=10.301030(0.01) = 10.30, so $10.30.

Adjusted principal is $1,030 and the annual coupon amount is $10.30 from $1,000 at 0.03 inflation for 1 year.

Applying the coupon to original par

The coupon rate is fixed, but its dollar amount uses adjusted principal. Applying 1 percent only to $1,000 misses the inflation adjustment.

Common questions

What does inflation adjust?

It adjusts principal. The fixed coupon rate then applies to that adjusted amount.

Is 2 percent a forecast?

No. It is the first teaching input for the identity.

Is this financial advice?

No. It is educational material showing principal adjustment and a coupon calculation.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.