TIPS Capital Return Consider a 3.25 percent TIPS with an issue CPI reference of 186.7.At the beginning of this year,the CPI was 197.5 and was at 202.4 at the end of the year.What was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and $1,000 par value.)
A)$4.90
B)$10.80
C)$15.70
D)$26.25

Question

Quizplus · Accepted Answer

First, we need to calculate the adjusted principal value at the end of the year using the CPI values:

Adjusted principal = (186.7/197.5) * $1,000 = $944.30
Adjusted principal at maturity = (186.7/202.4) * $1,000 = $920.07

Next, we calculate the semi-annual coupon payment:
Coupon payment = (3.25/2) * $944.30 = $15.34

Since the TIPS pays semi-annual coupons, we need to adjust the coupon payment based on the number of semi-annual periods that have passed. In this case, there are two semi-annual periods (beginning and end of the year).

Adjusted coupon payment = 2 * $15.34 = $30.68

Finally, we can calculate the total return:

Total return = (Adjusted principal at maturity + Adjusted coupon payments) - $1,000

Total return = ($920.07 + $30.68 + $30.68) - $1,000 = $-18.57

This is a negative total return, meaning that the investor lost money. The capital loss in dollars is $18.57. Therefore, the capital gain is $0, and none of the answer choices are correct.