One year ago, you purchased a newly-issued TIPS bond that has a 4% coupon rate, five years to maturity, and a par value of $1,000.The average inflation rate over the year was 3.6%.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, which increases with inflation. With a 3.6% inflation rate, the new principal is $1,000 * 1.036 = $1,036. The coupon payment is 4% of $1,036, which is $41.44.

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