## 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