In 1997, the U.S. Treasury issued "Treasury inflation-protected securities" (TIPS). These are fixed- income securities that are inflation indexed to protect their value against inflation. Like conventional bonds, they have a fixed coupon rate and maturity date, but the face value is periodically adjusted for inflation by multiplying the original face value by the ratio of the Consumer Price Index (CPI) at the current date to the CPI at the original issue date. At maturity, the bondholder receives the maximum of the inflation-adjusted face value or the original face value. Hence, if deflation occurs, the bondholder is guaranteed not to lose on the face value. A chart of the historical CPI annual percent changes over the past 20 years, for illustrative purposes only, is provided below. Percent 7.5 5.0 2.5 rumly . hun al my 0.0 -2.5 Oct Oct Oct 2002 Oct 2004 Oct 2006 Oct 2008 Oct 2010 Oct 2012 Oct 2014 Oct 2018 Oct 2020 2000 2016 Hover over chart to view data. Note: Shaded area represents recession, as determined by the National Bureau of Economic Research Source: U.S. Bureau of Labor Statistics. In October, 2010, you observe the following prices of two 10-year Treasury inflation-protected securities (TIPS): TIPS 1: P1 = 79.66 P2 = 100.00 C1 = 3% C2 = 6% F1 = 100 F2 = 100 TIPS 2: where P is the price, C is the coupon rate, and F is the original face value. Compute the price of a theoretical 10-year inflation-adjusted zero coupon bond with original face value of 100. Please round your numerical answer to 2 decimal places. Hint: you do not need to know the precise numerical values for the CPI annual percent changes in order to solve this problem. In 1997, the U.S. Treasury issued "Treasury inflation-protected securities" (TIPS). These are fixed- income securities that are inflation indexed to protect their value against inflation. Like conventional bonds, they have a fixed coupon rate and maturity date, but the face value is periodically adjusted for inflation by multiplying the original face value by the ratio of the Consumer Price Index (CPI) at the current date to the CPI at the original issue date. At maturity, the bondholder receives the maximum of the inflation-adjusted face value or the original face value. Hence, if deflation occurs, the bondholder is guaranteed not to lose on the face value. A chart of the historical CPI annual percent changes over the past 20 years, for illustrative purposes only, is provided below. Percent 7.5 5.0 2.5 rumly . hun al my 0.0 -2.5 Oct Oct Oct 2002 Oct 2004 Oct 2006 Oct 2008 Oct 2010 Oct 2012 Oct 2014 Oct 2018 Oct 2020 2000 2016 Hover over chart to view data. Note: Shaded area represents recession, as determined by the National Bureau of Economic Research Source: U.S. Bureau of Labor Statistics. In October, 2010, you observe the following prices of two 10-year Treasury inflation-protected securities (TIPS): TIPS 1: P1 = 79.66 P2 = 100.00 C1 = 3% C2 = 6% F1 = 100 F2 = 100 TIPS 2: where P is the price, C is the coupon rate, and F is the original face value. Compute the price of a theoretical 10-year inflation-adjusted zero coupon bond with original face value of 100. Please round your numerical answer to 2 decimal places. Hint: you do not need to know the precise numerical values for the CPI annual percent changes in order to solve this
