Question

An investor buys a $10,000 par, 4.25 percent annual coupon TIPS security with three years to maturity. If inflation every six months over the investor's holding period is 2.50 percent, what is the final payment the TIPS investor will receive

A. $10,213.00 B. $10,869.28 C. $11,822.25 D. $11,843.37 E. $12,201.11

Answer 1

D. $11,843.37

Step-by-step explanation:

`principal * (1+\alpha)^6 * (1+r_n)`

We will adjust by inflation the principal, and then calculate the interest.

Inflation is 0.025 every six month, and it is compounding interest.

Our rate will be for six month as well. Because TIPs pay interest semianually as well.

`principal * (1+0.025)^6 * (1+0.0425/2)`

11,843.36903