Consider a 3.25 percent TIPS with an issue CPI reference of 186.7. At the beginning of this year, the CPI was 197.5 and was at 202.4 at the end of the year. What was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and $1,000 par value.)
A) $4.90
B) $10.80
C) $15.70
D) $26.25

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 initial CPI was 197.5, and it increased to 202.4. The capital gain is calculated as follows:1. Calculate the initial inflation-adjusted principal: $ \frac{197.5}{186.7} \times 1000 = 1057.76 $ (approximately).2. Calculate the final inflation-adjusted principal: $ \frac{202.4}{186.7} \times 1000 = 1084.01 $ (approximately).3. The capital gain is the difference between the final and initial inflation-adjusted principals: $ 1084.01 - 1057.76 = 26.25 $.Therefore, the capital gain of the TIPS in dollars is $26.25.