Question

Consider a 2.40 percent TIPS with an issue CPI reference of 190.5. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 200.4. For the interest payment in the middle of the year, the CPI was 203.4. Now, at the end of the year, the CPI is 207.1 and the interest payment has been made.

  

What is the total return of the TIPS in dollars? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

What is the total return of the TIPS in percentage? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Total return of the TIPS in dollars

The total return of the TIPS in dollars = Gain from the TIPS + Mid-year Interest payment + End of the year Interest payment

Gain from the TIPS

Gain = Ending Value of TIPS – Beginning Value of TIPS

= [$1,000 x (207.10/190.50)] - [$1,000 x (200.40/190.50]

= $1,087.14 - $1,051.97

= $35.17

Mid-year Interest = [$1,000 x (203.40/190.50)] x 0.0240 x ½ = $12.81

End of year Interest = [$1,000 x (207.10/190.50)] x 0.0240 x ½ = $13.05

Therefore, The total return of the TIPS in dollars = Gain from the TIPS + Mid-year Interest payment + End of the year Interest payment

= $35.17 + $12.81 + $13.05

= $61.03

“The total return of the TIPS in dollars will be $61.03”

The total return of the TIPS in Percentage

The total return of the TIPS in Percentage = [Total return of the TIPS in dollars / Beginning Value of TIPS] x 100

= [$61.03 / $1,051.97] x 100

= 5.80%

“The total return of the TIPS in Percentage will be 5.80%”