Question

You own a TIPS bond that has a 4.2% coupon, pays semiannually, and has 1 year left to maturity. The yield is 4.6%. The CPI index increases from 233.5 to 244.2 in the next six months. Then it increases to 259.32 in the following six month. Calculate the price of this TIPS bond.

		$1104.86
		$1104.91
		$1104.96
		$1105.01
		None of the above.

Answer 1

Solution:- Given in Question-

Coupon Rate = 4.20%

Yield = 4.60%

Let Face Value of Bond = $1000

To Calculate the price of this TIPS Bond-

Increase in CPI Index (In first six month) =

Increase in CPI Index (In first six month) =

Increase in CPI Index (In first six month) = 4.58%

Increase in CPI Index (In next six month) =

Increase in CPI Index (In next six month) =

Increase in CPI Index (In next six month) = 6.47%

Total Increase in CPI Index = Increase in CPI Index (In first six month) + Increase in CPI Index (In next six month)

Total Increase in CPI Index = 4.58% + 6.47%

Total Increase in CPI Index = 11.05%

Price of TIPS Bond = Face Value * (100% + Total Increase in CPI Index )

Price of TIPS Bond = $1,000 * (100% + 11.05%)

Price of TIPS Bond = $1,110.50

Hence Correct answer is point E i.e. None of the above.

Thanks.