The following questions are about Treasury Inflation Protected Securities (TIPS). (a) What is meant by the real
Question:
(a) What is meant by the “real rate”?
(b) What is meant by the “inflation-adjusted principal”?
(c) Suppose that the coupon rate for a TIPS is 3%. Suppose further that an investor purchases $10,000 of par value (initial principal) of this issue today and that the semiannual inflation rate is 1%.
1. What is the dollar coupon interest that will be paid in cash at the end of the first six months?
2. What is the inflation-adjusted principal at the end of six months?
(d) Suppose that an investor buys a five-year TIP and there is deflation for the entire period. What is the principal that will be paid by the Department of the Treasury at the maturity date?
(e) What is the purpose of the daily index ratio?
(f) How is interest income on TIPS treated at the federal income tax level? Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
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a In terms of TIPS the real rate is the coupon rate This is discussed below The US Department of the Treasury issues Treasury securities that adjust for inflation These securities are popularly referr...View the full answer
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