Question

Suppose you purchase a $1,000 TIPS on January 1, 2016. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 4 percent, 4 percent, 3 percent, and 4 percent, respectively. For each six-month period, calculate the accrued principal and coupon payment. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Answer:

FIRST MONTH:

Accrued principal= $1,040

Coupon payment = $5.2

SECOND MONTH:

Accrued principal = $1,081.6

Coupon payment= $5.41

THIRD MONTH:

Accrued principal= $1,114.048

Coupon payment = $5.57

FOURTH MONTH:

Accrued principal = $1,147.47

Coupon payment = $5.74

Explanation:

Accrued principal is calculated as;

Amount × (1 + %term rate) ...........(1)

Coupon payment is calculated as;

Accrued principal × %period rate × term period)............(2)

The interest rate on the principal for the first, second, third, and fourth month are 4%, 4%, 3%, 4% respectively.

He fixed interest for the coupon is 1% and the period of interest is every six months.

FOR THE FIRST SIX MONTH

Accrued principal;

$1000 × (1 + 0.04) = $1,040

Coupon payment;

$1,040 × 0.01 × 1/2 = $5.2

FOR THE SECOND SIX MONTH

Accrued principal;

$1,040 × (1 + 0.04) = $1,081.6

Coupon payment;

$1,081.6 × 0.01 × 1/2 = $5.41

FOR THE THIRD SIX MONTHS

Accrued principal;

$1,081.6 × (1 + 0.03) = $1,114.048

Coupon payment;

$1,114.048 × 0.01 × 1/2 = $5.57

FOR THE FOURTH SIX MONTH

Accrued principal;

$1,114.048 × (1 + 0.03) = $1,147.47

Coupon payment;

$1,147.47 × 0.01 × 1/2 = $5.74