A 2.95 percent TIPS has an original reference CPI of 180.2. If the current CPI is 205.1, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)
A)$878.60, $16.79, respectively
B)$1,000.00, $29.50, respectively
C)$1,138.18, $16.79, respectively
D)$1,138.18, $29.50, respectively

Question

Quizplus · Accepted Answer

First, we need to calculate the adjusted principal value using the current CPI. This is done by multiplying the original reference CPI by the ratio of the current CPI to the original reference CPI:

Adjusted principal value = $1,000 * (205.1 / 180.2) = $1,138.18

Next, we need to calculate the semiannual interest payment. This is done by multiplying the adjusted principal value by half the coupon rate:

Interest payment = $1,138.18 * (2.95%/2) = $16.79

Therefore, the correct answer is C, with an interest payment of $16.79 and a par value of $1,138.18.

A 295 Percent TIPS Has an Original Reference CPI of 180