If an investor purchases a 3%,2-year TIPS and the CPI increases 3% over each of the next 2 years,how much does the investor receive at maturity?

Question

Quizplus · Accepted Answer

TIPS adjust the principal based on the CPI. After the first year, the principal becomes $1,030 ($1,000 * 1.03). After the second year, it becomes $1,060.90 ($1,030 * 1.03). The interest is paid on the adjusted principal. At maturity, the investor receives the adjusted principal of $1,060.90 plus the final interest payment of $31.83 ($1,060.90 * 0.03), totaling $1,092.73.

If an Investor Purchases a 3%,2-Year TIPS and the CPI