Treasury inflation protected security

[zxfmontreal]

Hey guys:

When we are calculating the coupon payment for TIPS, is it based on the original principle or the principle adjusted for inflation?

For example, if a TIPS bond has 4% coupon on June 1^st, by December 31^st the same year, the annual inflation rate is 3%. What will be the new principle and the interest payment?

Plz help!

Thx!

[S2000magician]

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

[zxfmontreal]

@S2000magician

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

Ok I see. Except it should be adjusted for half a year too right? So the adjusted principle is 1000*1.015=1015 and the interst is 1015*0.02=20.3.

[S2000magician]

@zxfmontreal

@S2000magician

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

Ok I see. Except it should be adjusted for half a year too right? So the adjusted principle is 1000*1.015=1015 and the interst is 1015*0.02=20.3.

Yes. I was thinking of the annual coupon. Sorry.

[suspense]

@zxfmontreal

@S2000magician

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

Ok I see. Except it should be adjusted for half a year too right? So the adjusted principle is 1000*1.015=1015 and the interst is 1015*0.02=20.3.

For the semi annual payment why did you use 1015 as the principal and not 1030

[S2000magician]

@suspense

@zxfmontreal

@S2000magician

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

Ok I see. Except it should be adjusted for half a year too right? So the adjusted principle is 1000*1.015=1015 and the interst is 1015*0.02=20.3.

For the semi annual payment why did you use 1015 as the principal and not 1030

Interesting question: how often is the principle increased? Semiannually, or annually?

[suspense]

@S2000magician

@suspense

@zxfmontreal

@S2000magician

It’s based on the adjusted principle; the coupon rate stays constant, but the coupon _ amount _ changes.

The new principle will be $1,030, and the new coupon will be 4% × $1,030 = $41.20.

Ok I see. Except it should be adjusted for half a year too right? So the adjusted principle is 1000*1.015=1015 and the interst is 1015*0.02=20.3.

For the semi annual payment why did you use 1015 as the principal and not 1030

Interesting question: how often is the principle increased? Semiannually, or annually?

Usually annually

[zxfmontreal]

But in this question, it is seminual.

[S2000magician]

Let’s compromise: quarterly.

[zxfmontreal]

@S2000magician

Let’s compromise: quarterly.

ok…let’s see what the exam asks for…

[S2000magician]

@zxfmontreal

@S2000magician

Let’s compromise: quarterly.

ok…let’s see what the exam asks for…

Where’s the skill in that? Anyone can get it right once they’ve seen the question.

[zxfmontreal]

Just saying it is important to read the question carefully in the exam.