Consider a 2.75 percent TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars this year?
A) $5.10
B) $11.20
C) $16.30
D) $27.69

Question

Quizplus · Accepted Answer

The capital gain of the TIPS is calculated based on the change in the CPI (Consumer Price Index) from the beginning to the end of the year. The formula to calculate the capital gain is: [(Ending CPI / Issue CPI) - 1] * Principal. Assuming a principal of $100 (as it's not specified), the calculation is: [(200.5 / 184.2) - 1] * $100 = (1.0884 - 1) * $100 = 0.0884 * $100 = $8.84. However, since the question asks for the capital gain in dollars this year and the provided options do not include $8.84, it seems there was a mistake in my initial calculation. Let's correct the approach considering the percentage change in CPI over the year and applying it correctly.The correct calculation for capital gain, taking into account the initial and final CPI values, should be based on the increase in CPI over the year and how that affects the principal. Given the initial and final CPI values (195.4 to 200.5), the correct approach is to calculate the percentage increase in the CPI and then apply this percentage to the principal amount to find the capital gain. However, without the exact principal amount or a clear formula based on the options provided, the calculation provided earlier was incorrect. The correct answer should reflect the actual increase in CPI and its impact on the TIPS value, but without the principal amount or a misunderstanding in the calculation process, the provided answer was incorrect. The correct calculation method involves understanding the TIPS adjustment mechanism, which adjusts the principal based on inflation as measured by the CPI. The options given (A, B, C, D) suggest specific dollar amounts for capital gain, which would require knowing the initial investment amount to accurately calculate the gain based on the CPI increase from 195.4 to 200.5. Without this, or a misinterpretation of the calculation method, the correct answer and explanation are not accurately provided based on the initial calculation mistake.