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Consider a 3 5/8 TIPS maturing 7/15/02 (settlement on 7/15/00). Assume the TIPS is trading at...

Consider a 3 5/8 TIPS maturing 7/15/02 (settlement on 7/15/00). Assume the TIPS is trading at par. What is the real yield to maturity on the TIPS? Also, what is the price of the TIPS, if the CPI has increased 12% from the time the TIPS has been issued (Assume an initial par value of M=100,000). Assume that the semi-annual inflation rate for the next two years equals 1.5%. Calculate the semi-annual coupon payments on the TIPS. Also calculate the par value on the maturity date 7/15/02.

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Answer #1
Par value Semi annual Inflation Maturity Value on
100000 12 112000 1/15/2001
112000 1.5 113680 1/7/2001
113680 1.5 115385.2 1/15/2002
115385.2 1.5 117115.978 1/7/2002

Assumuing initial par value of M = 100000, each TIPS will be maturing at 117115.978

And 3 5/8 TIPS maturity value will be 424545.4203
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