Question

a 2.875 percent tips has an original reference cpi of 185.3. if the current cpi is 210.6, what is the par value and current interest payment of the tips? (do not round intermediate calculations. round your final answer to 2 decimal places.)

Answer 1

To find the par value and current interest payment of the TIPS, calculate the change in CPI and use it to calculate the par value. Then, calculate the current interest payment using the par value and the interest rate.

Step-by-step explanation:

To find the par value and current interest payment of the TIPS, we first need to calculate the change in the CPI.

Change in CPI = Current CPI - Original Reference CPI = 210.6 - 185.3 = 25.3

Par value = (Original Reference CPI / 100) * (Change in CPI + 100) = (185.3 / 100) * (25.3 + 100) = 48.4949

Current interest payment = Par value * (2.875 / 100) = 48.4949 * (2.875 / 100) = 1.3936

Answer 2

The par value of TIPS is calculated by adjusting the original principal based on the current and reference CPI values, and the current interest payment is calculated using the adjusted principal and the given interest rate. The process involves multiplying the original principal by the CPI ratio and then applying the interest rate to the adjusted principal.

Step-by-step explanation:

To calculate the par value and the current interest payment of the Treasury Inflation-Protected Securities (TIPS), we need to adjust the original principal with the change in the Consumer Price Index (CPI) and apply the given interest rate.

Par Value Calculation

The adjusted principal (par value) is found by multiplying the original principal by the ratio of the current CPI to the original reference CPI.

Adjusted Principal = Original Principal × (Current CPI / Original Reference CPI)

For a $1,000 original principal (common par value for TIPS), the adjusted principal would be:

Adjusted Principal = $1,000 × (210.6 / 185.3)

This calculation will give you the adjusted par value of the TIPS.

Interest Payment Calculation

The semiannual interest payment is determined by the adjusted principal times half the annual interest rate (since TIPS typically pay interest semiannually).

Current Interest Payment = Adjusted Principal × (Interest Rate / 2)

Apply the given interest rate of 2.875% to the adjusted principal obtained from the previous step to calculate the current interest payment.

Note that the specific value of the original principal or the face value of the TIPS was not given in the question, so you would have to use the standard $1,000 face value or another value if it is provided. Also, ensure to round your final answers to two decimal places according to the instructions.