Question

Consider an investor who, on January 1, 2019, purchases a TIPS bond with an original principal of $111,000, an 10 percent annual (or 5 percent semiannual) coupon rate, and 15 years to maturity.

a. If the semiannual inflation rate during the first six months is 0.5 percent, calculate the principal amount used to determine the first coupon payment and the first coupon payment (paid on June 30, 2019).
b. From your answer to part a, calculate the inflation-adjusted principal at the beginning of the second six months.
c. Suppose that the semiannual inflation rate for the second six-month period is 1.3 percent. Calculate the inflation-adjusted principal at the end of the second six months (on December 31, 2019) and the coupon payment to the investor for the second six-month period.

(For all requirements, round your answers to 2 decimal places. (e.g., 32.16))

a.	Coupon payment
b.	Inflation-adjusted principal
c.	Inflation-adjusted principal at the end of the second six months
	Coupon payment

Answer 1

	Original Principal Amount	$ 1,11,000.00
	Year of maturity	15
	Annual coupon rate	10%
	Semi annual coupon rate	5%
	First six month semiannual inflation rate	0.50%
a)	June 30th
	The Inflation adjusted principal=(111000*1.005)	$ 1,11,555.00
	Coupon Payment=(111555*5%)	$       5,577.75
b)	The Inflation adjusted principal at the beginning of second month is	$ 1,11,555.00
C)	Second six month semiannual inflation rate	1.30%
	Inflation adjusted principal=(111555*(1.013)	$ 1,13,005.22
	Semi annual coupon payment=(113005*5%)	$       5,650.26