It
is now 6 month after you just purchased a $1,000 face
value TIPS (Treasury Inflation
Protected Security). If the current inflation rate is 4% per year, and the security pays an annual coupon rate of 3%.
What is the coupon payment that you can expect to
receive today?
a) $30.60
b) $15
c) $6.50
d) $15.30
e) $30
The correct answer is d.
TIPS are a special type of Treasury note or bond that
offers protection from inflation. When you buy an
inflationindexed 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
inflation principal.
Now we can easily calculate the coupon payment as
follows:
$1,020 x [(1/2)(0.03)] = $15.30
After purchasing the TIPS 6 months ago we can expect
to receive a semiannual payment of $15.30.
MORE FAQS

If an investor has a required rate of return of 10% on a 20year zero ...

What is the difference between a bond's yield rate and its coupon rate?

How does the money from the interest on my bond get to me?

What is the difference between yield to maturity and the coupon rate?

If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive $100 each year regardless of what the yield is?

How can I calculate a bond's coupon rate in Excel?

How does a bond's coupon rate affect its price?

What is the most common solvency ratios used in fundamental analysis?

How do I calculate yield of an inflation adjusted bond?

Why do bond coupon rates vary so greatly?

Are highyield bonds better investments than lowyield bonds?

How does a bond's coupon interest rate affect its price?

What is accrued interest, and why do I have to pay it when I buy a bond?

How does the amount of the principal fluctuate depending on inflation?

Federal student loan rates: who sets them, why they vary

How are you taxed after selling a mutual fund in a Roth IRA?

Can I take my 401(k) to buy a house?

How do I calculate my gains and/or losses when I sell a stock?

How do I calculate my Social Security breakeven age?

Are high yield bonds a good investment?
RELATED FAQS

If an investor has a required rate of return of 10% on a 20year zero ...
The correct answer is d. The value of a zero coupon bond is the present value of the lumpsum principal payment. There is ... 
What is the difference between a bond's yield rate and its coupon rate?
Learn why bond coupon payments, which are a series of fixed payments made to a bondholder throughout the life of the bond, ... 
How does the money from the interest on my bond get to me?
When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ... 
What is the difference between yield to maturity and the coupon rate?
Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... 
If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...
Simply put: yes, you will. The beauty of a fixedincome security is that the investor can expect to receive a certain amount ... 
How can I calculate a bond's coupon rate in Excel?
Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ...

TIPS Spread
TIPS spread compares the yield of the Treasury Inflation Protection ... 
InflationIndexed Security
A security that guarantees a return higher than the rate of inflation ... 
Coupon Rate
The yield paid by a fixed income security. A fixed income security's ... 
Short Coupon
A payment made on a bond within a shorter time interval than ... 
Inflation Protected
The types of investments that provide protection against inflation ... 
Ex Coupon
A bond or preferred stock that does not include the interest ...