Question

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

Answer 1

Answer:

Amount of the coupon payment $62.52

Current face value of the bond $1,042

Explanation:

The bond price, which will be indexed to the inflation rate will be:

$1,000*1.042

= $1,042

The coupon interest payment will be based on the coupon rate as well as the new face value.

Therefore the interest amount will be:

$1,042*.06

= $62.52