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• \$2,200
The right answer is the one PassedTense (check mark logo) voted for.

The first coupon rate is 3.25% + 1.25% = 4.50%. That rate is floored up to 5.00%. The semiannual coupon payment is 5.00% * \$25,000 * 0.5 = \$625. (Remember that as these are semiannual coupons; the actual payment is half the annual amount.)

The second coupon rate is 4.75% + 1.25% = 6.00%. (The floor does not affect this rate.) The semiannual coupon payment is 6.00% * \$25,000 * 0.5 = \$750.

The third coupon rate is 5.25% + 1.25% = 6.50%. (The floor does not affect this rate either.) The semiannual coupon payment is 6.50% * \$25,000 * 0.5 = \$813.

The total payout then is \$625 + \$750 + \$813 = \$2,188.

• edited November 2015
@PassedTense Since TIPS is capital indexed bonds. So we need to adjust principal value in each period and then calculate for the coupon in each period right?
It's slightly more than 2,200. It would be the same answer anyway.