One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000.The average inflation rate over the year was 4.2%.What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Question

Quizplus · Accepted Answer

The coupon payment is calculated based on the adjusted principal. The principal is adjusted for inflation, so it becomes $1,042 ($1,000 * 1.042). The coupon payment is 6% of the adjusted principal, which is $62.52 ($1,042 * 0.06).

One Year Ago, You Purchased a Newly-Issued TIPS Bond That