Question

An investor buys a $1,000 par TIPS security with 3 years to maturity, a semiannual coupon, and a 4.25% coupon rate. If inflation over the next 6 months is 2.50%, what will be the first coupon payment that the TIPS investor will receive?

Answer 1

$1,184.34

Step-by-step explanation:

Adjusted face value = 1,000 * (1+2.50%) ^ (3*2)

Adjusted face value = 1,000 * 1.025^6

Adjusted face value = 1,000 * 1.159693

Adjusted face value = $1,159.693

Final payment = Coupon + Adjusted principal

= 1,159.693 * (4.25%/2) + 1,159.693

= 1,159.693 * 0.02125 + 1,159.693

= 24.6435 + 1,159.693

= 1,184.3365

= $1,184.34