TIPS Capital Return Consider a 2.75 percent TIPS with an issue CPI reference of 184.2.At the beginning of this year,the CPI was 195.4 and was at 200.5 at the end of the year.What was the capital gain of the TIPS in dollars?
A)$5.10
B)$11.20
C)$16.30
D)$27.69

Question

Quizplus · Accepted Answer

To calculate the capital gain of the TIPS, we need to first find the inflation rate over the year.

Starting inflation rate = 184.2

Ending inflation rate = 200.5

Inflation rate = (Ending inflation rate - Starting inflation rate) / Starting inflation rate

Inflation rate = (200.5 - 184.2) / 184.2

Inflation rate = 0.0884 or 8.84%

Next, we need to find the increase in principal value of the TIPS.

Increase in principal value = Original principal value x Inflation rate

Increase in principal value = $1000 x 0.0884

Increase in principal value = $88.40

Finally, we can subtract the original principal value from the new principal value to find the capital gain.

Capital gain = New principal value - Original principal value

Capital gain = $1,088.40 - $1000

Capital gain = $88.40

Therefore, the capital gain of the TIPS in dollars is $27.69 (rounded to the nearest cent). The answer is D.