The Harvard Management Company and Inflation-Protected Bonds
1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon. (b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power. (c)TIPS are simultaneously related to change of inflation rate which means the principal and coupon will adjust instantly to change of inflation rate. TIPS like Regular Treasury bonds …show more content…
(b)We know the correlations of inflation-indexed bonds and other asset class (exhibit 4) and percentage of all asset classes in proposed portfolio, therefore we estimate correlation between TIPS and proposed Policy Portfolio by combining both data.
(c) Because TIPS has a relatively low correlation with other asset classes in Policy Portfolio (Except Domestic bonds, because of