Addison buys a $10,000 par of a 2 year, 10% semi-annual coupon TIPS. How much she...

Addison buys a $10,000 par of a 2 year, 10% semi-annual coupon TIPS.

How much she will receive on the coupon payment date a year from today, assuming the expected inflation rate is 2%?

		500
		510
		1020
		1000

Expert Solution

Sol:

Present value (PV) = $10,000

Coupon rate = 10%, Semiannual = 10 / 2 = 5%

Inflation rate = 2%

Adjusted PV for inflation = 10,000 + (10,000 x 2%)

Adjusted PV for inflation = 10,000 + 200 = 10,200

Semiannual Coupon payment = 10,200 x 5% = $510

Therefore amount she will receive on the coupon payment date a year from today will be $510

jeff jeffy answered 3 years ago

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