An investor buys a $10,000 par,4.25 percent annual coupon TIPS security with three years to maturity. If inflation every six months over the investor's holding period is 2.50 percent,what is the final payment the TIPS investor will receive?

Question

Quizplus · Accepted Answer

The TIPS security is inflation-protected. Its coupon rate is fixed, and its principal is adjusted for inflation.

To calculate the final payment the investor will receive, we need to use the following formula:

Final payment = Par value + (Par value × semi-annual inflation rate × number of semi-annual periods)

In this case, the par value is $10,000, the semi-annual inflation rate is 2.50% or 0.025, and the number of semi-annual periods is 6 (since the investor holds the security for three years, or six six-month periods).

Final payment = $10,000 + ($10,000 × 0.025 × 6) = $11,843.37

Therefore, the correct answer is (D).

An Investor Buys a $10,000 Par,4