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Accounting for the increase in par value of TIPS

unknown

Using Q2017 Deluxe for Windows is there a way to reflect the increase in the par value of Treasury Inflation Protected Securities (TIPS) and at the same time the interest income resulting from the amortization. I tried using add securities to account for the increase in par value but it resulted in new purchases.

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Sherlock

To track the par value, I suggest you use an entry in the price history of the security (divide par value by number of shares).

To track a taxable inflation adjustment, I suggest you use a self-referencing IntIncX (Interest Income & Transfer) action transaction.

unknown

Sherlock, I have tried using the Reinvested Income and while it adjusts the par value it also creates a new purchase date, which should not happen with TIPS. I do not understand how to create a self referencing IntIncX transaction. perhaps you could explain how for me. Finally, I have only seen a IntIncX transaction as a result of a download.

Sherlock

Sherlock, I have tried using the Reinvested Income and while it adjusts the par value it also creates a new purchase date, which should not happen with TIPS. I do not understand how to create a self referencing IntIncX transaction. perhaps you could explain how for me. Finally, I have only seen a IntIncX transaction as a result of a download.

By a self-referencing transfer, I mean a transfer from an account to the same account.

In an ordinary brokerage account, you should be able to enter the IntIncX action transaction directly in the transaction list (at a new entry, choose IntIncX from the Action pull-down menu, the security from the Security pull-down menu, and the inflation adjustment in the Amount field) or by selecting Enter Transactions and choosing Inc - Income (Div, Int, Etc) from the Enter transaction: pull-down menu (select the security from the Security name: pull-down menu, the account from the Transfer account: pull-down menu, and enter the inflation adjustment in the Interest: field).

Note: You don't need to track the inflation adjustment in a tax-deferred account.

unknown

I appreciate your responses. However, when I followed your suggestion it simply created an income item. There doesn't seem to be any way to record the increase in par value and maintain the dating. It seems that the reinvest income is the best available option but not quite correct.

Sherlock

I appreciate your responses. However, when I followed your suggestion it simply created an income item. There doesn't seem to be any way to record the increase in par value and maintain the dating. It seems that the reinvest income is the best available option but not quite correct.

You have not followed the advice provided. For the par value, I suggested you use an entry in the price history of the security (divide par value by number of shares).

Good luck.

unknown

There is no logic in creating a fictitious market value. TIPS represent a significant portion of the bond market, Quicken should have a way to properly reflect the transactions within the Interest Income dialog box such that it is called amortization that would function like Reinvested Income except that it would not result in creating small "purchases" when in reality the par value increased on a specific day but the date of purchase doesn't change. Your solution would require a daily adjustment to the pricing in order to have quicken at least approximate the market value of the securities. If I need to do that I can use Excel and direct download of information.

Sherlock

There is no logic in creating a fictitious market value. TIPS represent a significant portion of the bond market, Quicken should have a way to properly reflect the transactions within the Interest Income dialog box such that it is called amortization that would function like Reinvested Income except that it would not result in creating small "purchases" when in reality the par value increased on a specific day but the date of purchase doesn't change. Your solution would require a daily adjustment to the pricing in order to have quicken at least approximate the market value of the securities. If I need to do that I can use Excel and direct download of information.

You're wrong. The fictitious market value is the inflation-adjusted principal and my solution does not require a daily adjustment to pricing.

As to what functionality Quicken should provide, you may certainly post an Idea.

NotACPA

There is no logic in creating a fictitious market value. TIPS represent a significant portion of the bond market, Quicken should have a way to properly reflect the transactions within the Interest Income dialog box such that it is called amortization that would function like Reinvested Income except that it would not result in creating small "purchases" when in reality the par value increased on a specific day but the date of purchase doesn't change. Your solution would require a daily adjustment to the pricing in order to have quicken at least approximate the market value of the securities. If I need to do that I can use Excel and direct download of information.

TIPS represent a significant portion of the bond market,

Sorry, but wrong again. TIPS are a tiny portion of the Government bond market.

unknown

As of July 31, 2018 there were 1.348 Trillion does of TIPS in the public hands, this represents 9% of the total debt.

unknown

Sherlock wrote "To track the par value, I suggest you use an entry in the price history of the security (divide par value by number of shares)." first I do not see how entering the par value divided by the "number of shares" addresses my question but it does create a meaningless price, after all the price history reflects the price of the security on any given date and is used to determine the market value at such date. So where am I wrong?

q_lurker

@Stephen Singer: I am not a TIPS investor so I lack some knowledge with respect to a suitable answer for you.

I will reference you to this MAC discussion (FWIW): https://getsatisfaction.com/quickencommunity/topics/idea-proper-pricing-of-tips-treasury-inflation-p...
I do not know of a comparable "Idea" post on the Win side.

It does seem to me that the response from n0dyjeff in that discussion may well be highly relevant. He makes the point that different brokerages handle the valuations differently.

My accounts at Fidelity report TIPS bonds' inflation adjusted price, while my accounts at Schwab report their unadjusted price.

For me, you have confused the the conversation with the introduction of the term "par value". I believe what Sherlock has offered you is comparable to what n0byjeff suggests -- the price (leading to the market value) for any day should be that day's ending market value divided by the number of bonds (shares) held. If your broker is not providing that price, currently you would need to compute that and enter it manually.

So you might want to explain what you mean by "par value" as different from market value.

On the amortization side -- again, I do not deal with TIPS. For general muni-bonds, my process for amortized bond premiums is to enter the full interest paid, a RtrnCap for the ABP amount, and a MiscExp transaction for that same ABP amount. The transaction record looks something like
---date --- Int -- SecurityName --- $750
---date --- RtrnCap -- SecurityName --- $156.25
---date --- MiscExp -- SecurityName --- ($156.25) -- Category: _IntIncTaxFree

The Int transaction records as _IntIncTaxFree income.
The RtrnCap reduces the cost basis of the bond (SecurityName) putting cash into the account
The MiscExp reduces the cash in the account and reduces the _IntIncTaxFree amount.

Whether any of that applies to your TIPS question and investment, I have no idea.

unknown

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

NotACPA

As of July 31, 2018 there were 1.348 Trillion does of TIPS in the public hands, this represents 9% of the total debt.

9% is a tiny amount of the total public debt, by your own numbers.

unknown

As of July 31, 2018 there were 1.348 Trillion does of TIPS in the public hands, this represents 9% of the total debt.

Fine, call it tiny, call insignificant I really do not care. Quicken, which considers itself as the premier financial management tool, should be able to handle it properly That is my point, not the size of the market. BTW, while it is "only" 9% it is 1.3 trillion perhaps that is insignificant to you as well.

Sherlock

@Stephen Singer: I am not a TIPS investor so I lack some knowledge with respect to a suitable answer for you.

I will reference you to this MAC discussion (FWIW): https://getsatisfaction.com/quickencommunity/topics/idea-proper-pricing-of-tips-treasury-inflation-p...
I do not know of a comparable "Idea" post on the Win side.

It does seem to me that the response from n0dyjeff in that discussion may well be highly relevant. He makes the point that different brokerages handle the valuations differently.
My accounts at Fidelity report TIPS bonds' inflation adjusted price, while my accounts at Schwab report their unadjusted price.
For me, you have confused the the conversation with the introduction of the term "par value". I believe what Sherlock has offered you is comparable to what n0byjeff suggests -- the price (leading to the market value) for any day should be that day's ending market value divided by the number of bonds (shares) held. If your broker is not providing that price, currently you would need to compute that and enter it manually.

So you might want to explain what you mean by "par value" as different from market value.

On the amortization side -- again, I do not deal with TIPS. For general muni-bonds, my process for amortized bond premiums is to enter the full interest paid, a RtrnCap for the ABP amount, and a MiscExp transaction for that same ABP amount. The transaction record looks something like
---date --- Int -- SecurityName --- $750
---date --- RtrnCap -- SecurityName --- $156.25
---date --- MiscExp -- SecurityName --- ($156.25) -- Category: _IntIncTaxFree

The Int transaction records as _IntIncTaxFree income.
The RtrnCap reduces the cost basis of the bond (SecurityName) putting cash into the account
The MiscExp reduces the cash in the account and reduces the _IntIncTaxFree amount.

Whether any of that applies to your TIPS question and investment, I have no idea.

q.lurker: TIPS are not amortized bonds although their par value may vary. The difference between the par value and the market value should be the accrued interest although investors pay more or less for the security on the open market. The accrued interest is paid twice a year. The change in par value is also federally taxed as interest (so, once a year, a self-referencing IntIncX for non-deferred accounts generally suffices).

It is difficult to track the daily market value of a TIPS in Quicken without recent pricing data. The price quoted by brokers then needs to be multiplied by the day's index ratio and adjusted to include accrued interest associated with the specific rate for the TIPS.

If we're not interested in selling our TIPS holdings, we can track the value of the holding's par value and accrued interest. The par value can be calculated by applying the index ratio provided monthly at treasurydirect.gov and the accrued interest by applying the fixed interest rate specific to our TIPS. Then, by setting an appropriate price in the price history, we may coerce Quicken to display the value of our holding as of a specific day. I suspect, for most, it suffices just to track the par value as the calculation is simple and to do so at intervals much less frequent than daily.

Sherlock

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

Again, I suggest you post your request as an Idea.

Tom Young

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

Here's a mechanism that might work for you, though I haven't tried it and I'm always a little leery of repeated use of the return of capital action as it seems to sometimes produce funky results in Quicken.

When there's an increase in par value (twice a year?) enter a return of capital transaction as a NEGATIVE number. That will increase the cost basis of the bond to the appropriate amount.

Then enter another MiscInc transaction in the same amount, crediting interest income. That will zero out the "negative cash" created for the first transaction.

I'm unclear about the bond pricing mechanism, maybe an example would help here, but Quicken's calc of market value is simply (some price x # of shares) so if that's not working for you because of the "par value" issue, then it seems like you need to translate the broker supplied number to one that works in Quicken.

unknown

Tom, I thought that your suggestion about using RoC as a negative might be a good work around. However, Quicken doesn't allow for a negative RoC. I am still of the opinion that TIPS and zero coupon bonds have this same issue of accreting par value and interest income and that Quicken should have a dialog box similar to Return of capital to reflect the increasing par value and interest income. Changing the "market value" simply requires too much work each day. Until Quciken makes a change I will continue to use reinvest income and deal with the erroneous capital gain data at maturity.

Tom Young

I was unsure if Quicken would accept a negative number for a return of capital action so I did a test and it did work. Using QW2018.

Jim_Harman

I was unsure if Quicken would accept a negative number for a return of capital action so I did a test and it did work. Using QW2018.

Entering a negative RoC is the method recommended in Quicken Help for zero coupon bonds.

Note in Qwin 2018 and perhaps earlier versions, to enter an negative RoC you must click on Enter Transactions and pick the transaction from the list.

If you enter a negative value directly in the transaction list (register) it is converted to a positive number.

Sherlock

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

Tom Young: Changing the cost basis of the bond does not help with tracking the par value but it may help with the calculation of the capital gain/loss in a non-deferred account. If you can't or don't want to use a return of capital transaction, a remove and add transaction should do the trick.

unknown

I was unsure if Quicken would accept a negative number for a return of capital action so I did a test and it did work. Using QW2018.

This will work for zero coupon because you accrete to par value from a discount. However, it does not work for TIPS where the accretion increases both the cost basis and the par value. Negative RoC only increases the cost basis.

Sherlock

Tom, I thought that your suggestion about using RoC as a negative might be a good work around. However, Quicken doesn't allow for a negative RoC. I am still of the opinion that TIPS and zero coupon bonds have this same issue of accreting par value and interest income and that Quicken should have a dialog box similar to Return of capital to reflect the increasing par value and interest income. Changing the "market value" simply requires too much work each day. Until Quciken makes a change I will continue to use reinvest income and deal with the erroneous capital gain data at maturity.

Changing the "market value" simply requires too much work each day.

You do not need to update the price history each day. I suggest you update the price history when you record the inflation adjustment.

Tom Young

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

The par value - meaning the amount to be received at maturity - and the basis are the same in this case at any point in time. Of course the ultimate par value and cost basis will only be known at maturity.

It seems like the issue is that "the quote " received has to be applied against an ever-changing par value /cost basis, a calculation that Quicken doesn't support. So it seems that a user needs to multiply the received quote times the current par value then divide that value be the number of bonds to come to a quote to use in Quicken.

Sherlock

Par value is a very important component in the TIPS discussion. TIPS trade based upon the original par value but the actual par value increases with inflation. My broker provides a daily pricing of the TIPS based upon the actual pricing of trades for the day. The issue comes in that the stated par value is always the original par value before inflation adjustments and Quicken doesn't have a reasonable mechanism to reflect the increasing par value. What Quicken should have is an Interest Income field that would allow for recording income and an increase in par value as of any given date but not create a new purchase such as results from using reinvest income.

The cost basis and par value of TIPS are not necessarily the same although the amount they change is the same (the inflation adjustment). (Note: The adjusted par value can not be less than the original par value.)

The appropriate calculation of a market value using a quote provided by a broker is not implemented in Quicken. To produce the correct quote for Quicken use, we would need to multiply the quote received by the adjusted par value divided by the original par value and add the accrued interest divided by the number of TIPS. (The adjusted par value divided by the original par value is referred to as the index ratio.)

The market value isn't really the adjusted par value for the same reasons the cost basis isn't the original par value. When we buy or sell the TIPS, we do not pay or receive the par value.

When we purchase a bond security, Quicken establishes an initial price in the price history to establish the original par value. If we don't accept quotes for the market value of the bond, this par value price is maintained. For a TIPS, I suggest we adjust this par value price to record the inflation adjustment.

Recording the TIPS inflation adjustment as interest applies to federal tax reported in non-deferred accounts. Adjusting the cost-basis is a way of treating the inflation adjustment as though an interest payment was reinvested.

It is worth noting when entering a return of capital transaction, we have an option to provide an adjusted market value though it does not appear the value is actually applied (for example, to generate a new price in the price history).