Question

Please do it by type not pics.

1.Consider a 5.20 percent TIPS with an issue CPI reference of 206.0. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 213.9. For the interest payment in the middle of the year, the CPI was 215.5. Now, at the end of the year, the CPI is 220.0 and the interest payment has been made.

What is the total return of the TIPS in dollars?

What is the total return of the TIPS in percentage?

Answer 1

1. Total return of the TIPS in dollars = $84.58

Explanation;

First of all let’s calculate gain on TIPS;

Gain on TIPS = Value at the end of year – Value at the Beginning of year

Value at the end of year [$1000 * 220 / 206] = $1067.96

Value at the beginning of year [$1000 * 213.9 / 206] = $1038.35

Thus gain will be ($1067.96 – $1038.35) =

= 1067.96 - 1052.27

= $29.61

The mid-year interest payment;

($1000 * 0.052 * 215.5 * 0.5) / 206 = $27.20

The end year interest payment;

($1000 * 0.052 * 220 * 0.5) / 206 = $27.77

Thus total return will be ($29.61 + $27.20 + $27.77) = $84.58

2. Total return of the TIPS in percentage = 8.1456%

Explanation;

Total return in dollar / Value at the Beginning of year

Value at the beginning of year [$1000 * 213.9 / 206] = $1038.35

Total return = $84.58

Thus percentage return will be ($84.58 * 100 / $1038.35) = 8.1456%