It is now 6 month after you just purchased a $1,000 face value TIPS ...

By Investopedia Staff AAA
Q:

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

A:

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 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 semi-annual payment of $15.30.

Have a Financial Question?

RELATED FAQS

  1. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ...
  2. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ...
  3. Which of the following statements is (are) true with respect to the calculation of ...

    The correct answer is: a) (I) is incorrect because results that cover a period of less than a year must "not" be annualized. ...
  4. Which of the following terms are associated with the purchase/redemption of open-end ...

    The correct answer is b. Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares ...
RELATED TERMS
  1. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  2. CFA Institute

    Formerly known as the Association for Investment Management and ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  4. Security Analyst

    A financial professional who studies various industries and companies, ...

You May Also Like

Related Articles
  1. Personal Finance

    Top 6 Ways To Recession-Proof Your Job

  2. Personal Finance

    A Guide To Financial Designations

  3. Professionals

    The Claritas Investment Certificate: ...

  4. Professionals

    10 Steps To A Career In Hedge Funds

  5. Professionals

    Study Does Not End After The CFA

Trading Center