Question

An investor holds $100,000 (par value) worth of TIPS currently trading at par. The coupon rate of 4% is paid semiannually, and the annual inflation rate is 2.5%. What coupon payment will the investor receive at the end of the first six months?A) $2,025.B) $2,050.C) $2,000.

Answer 1

Answer:

coupon payment = $2025

so correct option is A) $2,025

Explanation:

given data

par value =  $100,000

coupon rate = 4%

annual inflation rate = 2.5%  = 0.025

so Semiannual rate = $\frac{0.025}{2}$ = 0.0125

to find out

coupon payment will the investor receive at the end of the first six months

solution

as we know principal would increase by the amount of inflation

so it will be = $100,000 ( 1 + 0.0125 )

so here coupon payment will as

coupon payment = $100,000 ( 1 + 0.0125 ) × $\frac{0.04}{2}$

solve it we get

coupon payment = $2025

so correct option is A) $2,025