A $1,000 TIPS (Treasury Inflation-Protected Security) is currently selling for $929 and carries a coupon interest rate of 5.41 percent.

a. If you buy this bond, how much will you receive for your first interest payment, assuming no interest adjustment to principal during this time period?

b. If there's a 0.83 percent increase in inflation, what will be the new par value of the bond?

c. What is your new semiannual interest payment?

d. What would the par value be at maturity, assuming a 2.50 percent annual inflation rate and ten-year maturity period?

Compound Sum of $1 (FVIF)

n

2.00%

2.25%

2.50%

2.75%

3.00%

1

1.020

1.023

1.025

1.028

1.030

5

1.104

1.118

1.131

1.145

1.159

10

1.219

1.249

1.280

1.312

1.344

15

1.346

1.396

1.448

1.502

1.558

20

1.486

1.561

1.639

1.720

1.806

25

1.641

1.744

1.854

1.970

2.094