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Suppose you purchase a $1,000 TIPS on January 1, 2016. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent, respectively. For each six-month period. Calculate the accrued principal and coupon payment.

Accrued Principal Coupon Payment
First 6 months $ $
Second 6 months $ $
Third 6 months $ $
Fourth 6 months $ $

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Answer:

The computation of the accrued principal and coupon payment is shown below:-

Explanation:

The computation of the accrued principal and coupon payment is given below:-

                                     Accrued principal     Coupon payment

First 6 months                    $1,020                              $15

                                   $1,000 × (1 + 0.02)       ($1,000 × 3% × 1 ÷ 2)

Second 6 months              $1,050.60                         $15.759

                                    $1,020 × (1 + 0.03)       ($1,050.60 × 3% × 1 ÷ 2)

Third 6 months                     $1,061.106                       $15.92

                                     ($1,050.60 × (1 + 0.01))  ($1,061.106 × 3% × 1 ÷ 2)

Fourth 6 months                   $1,082.32                         $16.23

                                     ($1,061.106 × (1 + 0.02))    ($1,082.32 × 3% × 1 ÷ 2)

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