TIPS Interest and Par Value A 2.5 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.)
A)$1,000, $7.16, respectively
B)$1,000, $15.09, respectively
C)$1,207.16, $7.16, respectively
D)$1,207.16, $15.09, respectively

Question

Quizplus · Accepted Answer

To calculate the current interest payment, we need to first find the adjusted principal value, which is:
Adjusted principal value = (Current CPI/Original CPI) x Par Value
Adjusted principal value = (205.7/170.4) x $1,000 = $1,207.16
The current interest payment is then calculated as:
Current interest payment = (Adjusted principal value x Coupon rate)/2
Current interest payment = ($1,207.16 x 2.5%)/2 = $15.09 (rounded to two decimal places)
Therefore, the current interest payment is $15.09 and the par value of the TIPS is $1,207.16. However, the question asks for the par value of $1,000 as this is the standard par value for TIPS. Therefore, the correct answer is D, with the par value being $1,000 and the interest payment being $15.09/($1,207.16/$1,000) = $7.16 (rounded to two decimal places).

TIPS Interest and Par Value a 2