Question 4: Pricing of Treasury Inflation-Protected Securities (TIPS). The face value of TIPS rises as inflation rises while the coupon payment varies with the adjusted face value of the bond. (6 points)

You purchased a ten-year coupon bond with a $1000 face value and a coupon rate of 9% five years ago. This bond pays annual coupons. At the time you purchased this bond (i.e. five years ago), the yield-to-maturity was 8%.

Today, five years later, the yield-to-maturity has declined to 6%. The face value of the bond increases to $1100 while the coupon rate remains 9%. You decide to sell the bond (assume that you have collected the 5th coupon payment today).

Part (a) (2 points)

Calculate the purchase price of the bond (the amount you paid for this bond five years ago).

Part (b) (2 points)

Calculate the sale price of the bond (the amount you would receive today by selling this bond today).

Part (c) (2 points)

You decide not to reinvest the coupon payments. Given your answers to Part (a) and Part (b), what is your holding period return on this investment for the five years, without reinvesting coupons?