Question

If an investor purchases a 5%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity

Answer 1

The real value of the principal at maturity would be $1,150.

Step-by-step explanation:

To calculate the real value of the principal at maturity, we need to take into account the increase in CPI (Consumer Price Index) over the 5-year period. Since CPI increases 3% each year, the total increase over 5 years would be 3% * 5 = 15%.

To calculate the real value of the principal at maturity, we can apply the formula: Real value = Principal value * (1 + CPI increase)

Therefore, the real value of the principal at maturity would be: $1,000 * (1 + 0.15) = $1,000 * 1.15 = $1,150.