The correct answer is d.
TIPS are a special type of Treasury note or bond that
offers protection from inflation. When you buy an
inflation-indexed security, you receive interest payments
every six months and a payment of principal when the
security matures. The difference with TIPS are that
the coupon payments and underlying principal are automatically
increased to compensate for inflation by tracking
the consumer price index (CPI).
To calculate the coupon payment you must first adjust
the principal for inflation. In this example:
$1,000 x [1 + (1/2)(0.04)] = $1,020 is the adjusted
Now we can easily calculate the coupon payment as
$1,020 x [(1/2)(0.03)] = $15.30
After purchasing the TIPS 6 months ago we can expect
to receive a semi-annual payment of $15.30.