TIPS Total Return Reconsider a 3.25 percent TIPS that was issued with CPI reference of 186.7.The bond is purchased at the beginning of the year (after the interest payment),when the CPI was 197.5.For the interest in the middle of the year,the CPI was 201.1.Now,at the end of the year,the CPI is 202.4 and the interest payment has been made.What is the total return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments and $1,000 par value.)
A)1.6 percent
B)2.4 percent
C)5.8 percent
D)9.1 percent

Question

Quizplus · Accepted Answer

The total return is calculated by considering both the inflation-adjusted principal and the interest payments. The principal is adjusted by the change in CPI from the beginning to the end of the year. The interest payments are based on the adjusted principal. The total return is the sum of the inflation-adjusted principal and interest payments, expressed as a percentage of the initial principal.