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# Question of the Week - Fixed Income

Des Moines, IA, USAPosts: 211 Sr Associate
edited September 2015
Erin purchases a ten-year TIPS bond with a \$25,000 face value. This particular issue pays semiannual coupons at a rate of the CPI + 125 basis points, with a floor of 5%. CPI rates for the first three reset dates are 3.25%, 4.75%, and 5.25%. The payout from this bond over the first three coupons is closest to?

## Question of the Week - Fixed Income 19 votes

\$2,200
36%
\$3,300
15%
\$4,400
47%

• TorontoPosts: 18 Associate
\$4,400
What is the right answer
• Des Moines, IA, USAPosts: 211 Sr Associate
\$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.

• Posts: 1 Associate
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.