Example of The Motley Fool spreading false information on TIPS

I have always been a vocal advocate that the Motley Fool is close to a scam in the world of investment advice. Their recommendations don't work and they window-dress their mutual fund products by closing down underperforming mutual funds (survivorship bias).

In this article, The Motley Fool clearly doesn't understand how Treasury Inflation-Protected Securities (TIPS) work and overstates its protection against inflation to be twice of what it actually is:

Here's how it works: every month, the government releases the latest reading on the CPI. The Treasury then boosts the principal value of every TIPS issue by that same amount. Interest payments are calculated based on the changing inflation-adjusted principal value. For instance, say inflation rose 1% over the course of a given year. A bond initially issued for $1,000 would see its principal amount rise $10 to $1,010. If those bonds pay 1% interest every six months, then the next interest payment would be $10.10 rather than $10, because of the boost from inflation.

I have highlighted the error part. First, there is a minor error that the face value is adjusted by inflation, not the change of inflation. Second, there is a material error that the interest (coupon) payment is actually calculated based on a face value adjusted for the inflation during the period equal to the payment frequency, not "inflation over a given year". In the example, if inflation is 1% that year, then US Treasury will deem inflation to be only 0.5% for the six month period, and the interest payment will be only $10.05.

I hope all fixed-income traders understand these products correctly and not misinformed by bad people.

Submitted October 31, 2018 at 01:43AM by Catfurst https://ift.tt/2PyPoKe