TIPS Interest and Par Value A 2½ percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Question

Quizplus · Accepted Answer

First, we need to calculate the current inflation rate:
Inflation rate = (Current CPI - Original CPI) / Original CPI
Inflation rate = (205.7 - 170.4) / 170.4
Inflation rate = 0.2075 or 20.75%

Next, we need to calculate the new par value:
New par value = Original par value x (1 + inflation rate)
New par value = $1,000 x (1 + 0.2075)
New par value = $1,207.16

Finally, we can calculate the current interest payment:
Current interest payment = (New par value x coupon rate) / 2
Current interest payment = ($1,207.16 x 0.025) / 2
Current interest payment = $15.09

Therefore, the answer is D) $1207.16, $15.09, respectively.

TIPS Interest and Par Value a 2½ Percent TIPS Has