Question

A 5.50 percent TIPS has an original reference CPI of 177.50. If the current CPI is 209.40, what is the current interest payment and par value of the TIPS? Assume semi-annual interest payments and $1,000 par value. (Round your answers to 2 decimal places.)

A. $55.00 $1,000.00, respectively
B. $55.00, $1,179.72, respectively
C. $27.50, $1,000.00, respectively
D. $32.44, $1,179.72, respectively

Answer 1

The current interest payment for the TIPS is $32.44, and the adjusted par value is $1,179.72. These values are calculated based on the inflation adjustment using the original and current CPI values, and the given interest rate.

Step-by-step explanation:

To calculate the current interest payment and par value of a Treasury Inflation-Protected Security (TIPS) with an original reference Consumer Price Index (CPI) of 177.50, a current CPI of 209.40, a 5.50 percent interest rate, and a $1,000 par value, we need to adjust the par value for inflation and calculate the interest based on the adjusted par value.

The adjusted par value is calculated as follows:

Adjusted Par Value = Original Par Value × (Current CPI / Original Reference CPI)

Adjusted Par Value = $1,000 × (209.40 / 177.50) = $1,179.72 (rounded to two decimal places)

Next, we calculate the semi-annual interest payment based on the adjusted par value:

Semi-annual Interest Payment = (Adjusted Par Value × Interest Rate) / 2

Semi-annual Interest Payment = ($1,179.72 × 0.055) / 2 = $32.44 (rounded to two decimal places)

The correct answer is D. $32.44, $1,179.72, respectively for the current interest payment and par value of the TIPS.