Question

A 3.125 percent TIPS has an original reference CPI of 185.1. If the current CPI is 210.4, what is the par value and current interest payment of the TIPS? (Do not round intermediate calculations and round your final answers to 2 decimal places.) Interest rate Reference CPI Current CPI 3.125% 185.1 210.4 Complete the following analysis. Do not hard code values in your calculations. Par value Interest payment.

Answer 1

Answer:

Par value $1,136.68

Interest payment $17.76

Explanation:

Par value or Face value is the values written on the face of security. The par value of the TIPS is directly proportional to the CPI, as CPI increases the face value of the TIPS is also increasead and vice versa.

First we need to list the available data

Original reference CPI = 185.1

Current CPI = 210.4

Standard Par value = $1,000

Use following Formula to calculate the related par value

Par Value = Standard Par value x Current CPI / Original reference CPI

Placing values in the formula

Par Value = $1,000 x 210.4 / 185.1

Par Value = $1,136.68

Now calculate the semiannual interest payment

Interest payment = Par value x Interest rate x Semiannual fraction

Placing values in the formula

Interest payment = $1,136.68 x 3.125% x 6/12

Interest payment = $17.76