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Consider an investor who on January 1 2014 purchases a TIPS bond with an original principal of $100000 an 8 percent annual or 4 percent semiannual coupon rate and 10 years to maturity

Consider an investor who, on January 1, 2014, purchases a TIPS bond with an original principal of $100,000, 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 0.3 percent, calculate the principal amount used to determine the first coupon payment and the first coupon payment (paid on June 30, 2014).

b. From your answer to part a, calculate the inflationadjusted principal at the beginning of the second six months.

c. Suppose that the semiannual inflation rate for the second six-month period is 1 percent. Calculate the inflationadjusted principal at the end of the second six months (on December 31, 2014) and the coupon payment to the investor for the second six-month period. What is the inflation-adjusted principal on this coupon payment date?

May 18 2020 View more View Less

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