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A $1,000 TIPS (Treasury Inflation-Protected Security) is currently selling for $957 and carries a coupon interest rate of 2
A $1,000 TIPS (Treasury Inflation-Protected Security) is currently selling for $957 and carries a coupon interest rate of 2.66 percent.
a. If you buy this bond, how much will you receive for your first interest payment, assuming no interest adjustment to principal during this time period? b. If there's a 1.23 percent increase in inflation, what will be the new par value of the bond? c. What is your new semiannual interest payment? d. What would the par value be at maturity, assuming a 2.75 percent annual inflation rate and ten-year maturity period? Click on the table icon to view the FVIF table % .
Expert Solution
A. Computation of First Interest Payment:
First semiannual interest payment = 2.66%*1000/2 = $26.6/2 = $13.3
B. Computation of New Par Value of Bond:
New par value = Original par value*(1+Inflation)
=1000*(1+1.23%)
=1012.3
C. Computation of New semiannual interest payment:
New semiannual payment = 2.66%*1012.3/2 = $26.93/2 = $13.46
D. Computation of Par Value at Maturity:
Par Value at Maturity or Future Value = Par Value*(1+Inflation Rate)^Number of Periods
= 1000*(1+0.0275)^10
= $1,311.65
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