Q5: An investor purchases a TIPS note with an original principal amount of $100,

Question

Q5: An investor purchases a TIPS note with an original principal amount of $100,000, a 3 percent annual coupon rate (1.5 percent semiannual coupon rate), and 10 years to maturity. If the semiannual inflation rate during the 6 months is 1 percent, and if inflation is 1.4 percent over the next 6month period, what are the adjusted principal amounts and coupon payments for these time periods?

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Semi-Annual Coupon Rate

Q5: An investor purchases a TIPS note with an original principal amount of $100,000, a 3 percent annual coupon rate (1.5 percent semiannual coupon rate), and 10 years to maturity. If the semiannual inflation rate during the 6 months is 1 percent, and if inflation is 1.4 percent over the next 6month period, what are the adjusted principal amounts and coupon payments for these time periods?

Find:

Principal Years to Maturity Coupon Rate

Semi-Annual Coupon Rate

Period CPI Adjusted Principal Coupon 1 1.00% 2 1.40% ……….. ……….. ……….. ………..

Explanation / Answer

Semi-Annual Coupon Rate

Period    CPI    Adjusted Principal                                                               Coupon
      1    1.00%    +$100,000 x (1+CPI) = $100,000 x (1+1%) = $101,000      Ajusted Principal x 1.5% = $1,515
      2    1.40%    +$101,000 x (1+CPI) = $101,000 x (1+1.4%) =$102,414     $102,414 x 1.5% = $1,536.21

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