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

Question

Q5: An investor purchascs a TIPS note with an original principal amount of $100,000, a 3 pcrcent annual coupon rate (1.5 pcrcent semiannual coupon ratc), and 10 ycars to maturity. If the semiannual inflation rate during the 6 months is 1 pcrcent, and if inflation is 1.4 percent over the next 6-month period, what are the adjusted principal amounts and coupon payments for these time periods? A TIPS Note Principal Years to Maturity Coupon Rate Semi-Annual Coupon Ratc CPI 1.00% 1.40% Period Adjusted Principal Coupon

Explanation / Answer

After first six-month period, Adjusted Principal = $100,000 x (1 + 1%/2) = $100,500

Coupon = 100,500 x 3%/2 = 1,507.50

After second six-month period, Adjusted Principal = $100,500 x (1 + 1.4%/2) = $101,203.50

Coupon = 101,203.50 x 3%/2 = 1,518.05

Period CPI Adj. Prin. Coupon 1 1% $ 100,500.00 $ 1,507.50 2 1.40% $ 101,203.50 $ 1,518.05

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