In: Finance
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 |
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