One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Question

Quizplus · Accepted Answer

TIPS (Treasury Inflation-Protected Securities) adjust both the principal and the interest payments for inflation. The original face value was $1,000, and with a 4.2% inflation rate, the adjusted face value becomes $1,000 * 1.042 = $1,042. The coupon rate is applied to the adjusted face value, so the coupon payment is 6% of $1,042, which equals $62.52.

One Year Ago, You Purchased a Newly-Issued TIPS Bond That