# 3. Problem on Inflation Risk The US Treasury started issuing TIPS (inflation protected securities) in 1997....

3. Problem on Inflation Risk The US Treasury started issuing TIPS (inflation protected securities) in 1997. The key provisions and features of these securities can be found at https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm, and are reported here The coupon rate which is set at auction, remains fixed throughout the term of the secur1 The principal amount of the security is adjusted for inflation, but the inflation adjusted principal will not be paid until maturity. Semiannual interest payments are based on the inflation-adjusted principal at the time the interest is paid. . The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U) published monthly by the Bureau of Labor Statistics (BLS) At maturity, the securities will be redeemed at the greater of their inflation adjusted principal or par amount at original issue . The main difference from other treasury bills is that the face value is adjusted for inflation, both for the final payments and for t used by the Treasury Department, the par value is the value of the principal, which corresponds to the face value for non inflation-indexed bonds. he setting of coupons In the terminology Consider the followings TIPS, issued on 1/1/2007 with maturity of 2 years and yearly coupon payments (the minimum maturity for TIPS is 5 years and coupon payments occur every six months, but these assumptions simplify the calculations) Assume the face value is 1000$, the coupon rate is 2% and that rate of change in the CPI U (the inflation measure used for the adjustment) is 1.8% from 1/1/2007 to 1/1/2008 and 2.4% from 1/1/2008 to 1/1/2009 Calculate the coupon payments in 1/1/2008 and 1/1/2009 and the inflation adjusted value of the principal in 1/1/2009. What is the yield to maturity (interest rate) on this bond? Now assume that the CPI-U between 1/1/2008 and 1/1/2009 is-1.4%. Compute the coupon payment in 1/1/2009 and the amount paid out at maturity. What is the yield to maturity for this bond? ## Answers #### Similar Solved Questions 1 answer ##### Let X be the number of heads in the first n flips and Y be the... Let X be the number of heads in the first n flips and Y be the number of heads in the next m flips. (a) Are X and Y independent?... 1 answer ##### Future values. Fill in the future values for the following​ table, using one of the three... Future values. Fill in the future values for the following​ table, using one of the three methods​ below: a. Use the future value​ formula, FV equals PV times left parenthesis 1 plus r right parenthesis Superscript nFV=PV×(1+r)n. b. Use the TVM keys from... 5 answers ##### On a large-scale topographic map, how are airports and major highways treated differently than houses and small features on a large-scale topographic map, how are airports and major highways treated differently than houses and small features? someone help me with this question?... 1 answer ##### At what initial conditions of the Lamm equation can an exact be found, and how are useful values ... At what initial conditions of the Lamm equation can an exact be found, and how are useful values for determining s, and D determined in all other conditions?... 1 answer ##### Presented below is information related to Blue Corporation for the month of January 2020. Cost of... Presented below is information related to Blue Corporation for the month of January 2020. Cost of goods sold$208,700 Salaries and wages expense $55,050 Delivery expense 6,400 Sales discounts 8,470 Insurance expense 12,400 Sales returns and allowances 12,180 Rent expen... 1 answer ##### You just won$25,000 and deposited your winnings into an account that pays 5.9 percent interest,...
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