Question

Consider a 3.60 percent TIPS with an issue CPI reference of 186.8. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 194.7. For the interest payment in the middle of the year, the CPI was 196.3. Now, at the end of the year, the CPI is 200.8 and the interest payment has been made.

What is the total return of the TIPS in dollars?

What is the total return of the TIPS in percentage?

Answer 1

_Solution:-

_{a) Calculation of the total return of TIPS in Dollars}

Gain from increase in value

= Value at year end - Value at the beginning of year
          = [200.80 / 186.80 x $1000] - [194.7 / 186.80 x $1000]
          = 1074.95 - 1042.29
          = $32.66

The mid-year interest payment was

= 1/2 x 0.036 x 196.30 / 186.80 x $1000 = $18.92

The end-of-year interest payment was

= 1/2 x 0.036 x 200.80 / 186.80x $1000 = $19.35

Total dollar return = $32.66 + $18.92 + $19.35 = $70.93

Total percentage return = $70.93 / $1042.29 = 6.81%