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
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.
The correct answer is d. The value of a zero coupon bond is the present value of the lump-sum principal payment. There is ...
Learn why bond coupon payments, which are a series of fixed payments made to a bondholder throughout the life of the bond, ...
When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ...
Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ...
Simply put: yes, you will. The beauty of a fixed-income security is that the investor can expect to receive a certain amount ...
Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ...
A treasury security that is indexed to inflation in order to ...
TIPS spread compares the yield of the Treasury Inflation Protection ...
A security that guarantees a return higher than the rate of inflation ...
The yield paid by a fixed income security. A fixed income security's ...
A payment made on a bond within a shorter time interval than ...
The types of investments that provide protection against inflation ...