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 semiannual 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

First, we need to calculate the adjusted principal of the TIPS using the formula:

Adjusted principal = (original principal) x (current CPI) / (original reference CPI)

Adjusted principal = $1,000 x 205.7 / 170.4 = $1,207.16

Next, we can calculate the semiannual interest payment using the formula:

Interest payment = (adjusted principal) x (coupon rate) / 2

Interest payment = $1,207.16 x 2.5% / 2 = $15.09

Therefore, the current par value of the TIPS is $1,207.16 and the current semiannual interest payment is $15.09. The closest option is D.

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