1 answer

Could use some help with this, thank you! Consider an investor who, on January 1, 2019,...

Question:

Could use some help with this, thank you!
Consider an investor who, on January 1, 2019, purchases a TIPS bond with an original principal of $113,000, an 8 percent annu
Consider an investor who, on January 1, 2019, purchases a TIPS bond with an original principal of $113,000, an 8 percent annual (or 4 percent semiannual) coupon rate, and 10 years to maturity. a. If the semiannual inflation rate during the first six months is 0.4 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 1.2 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

Answers

Original Principal =   $113,000  
Semiannual coupon rate=   4%  
      
in TIPS bond interest for next period is based on Previous period inflation adjusted principal. At start of Bond purchase, coupon is paid on original principal. thereafter on each starting date, principal is adjusted for inflation.      
      
For first 6 month, Coupon = Principal*Coupon rate Semiannual      
113000*4%      
4520      
      
At the beginning of second 6 months, principal = previous principal*(1+semiannual inflation rate during last 6 months)      
113000*(1+0.4%)      
113452      
      
Coupon paid for next 6 months = Principal adjusted*Coupon Rate      
113452*4%      
4538.08      
      
during next 6 months inflation is 1.2%      
So principal at end of 6 months =       
113452*(1+1.2%)      
114813.424      
      
a. Coupon payment   4520  
b. inflation adjusted principal   113452  
c.

Inflation adjusted principal for second six months=   114813.42  
Coupon payment 4538.08  

.

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