Question

anda points),TIPS, A 2-year TIPS that pays 1% annual coupo and-0.5% yield to maturity. ns has $100 face value (a) What is the price of the TIPS today (b) Suppose the Consumer Price Index (CPI) go sup by 2%forthe next year, w are the new face value, coupon payment, and price of the bond one year from now just after the first coupon is paid? Assume that the coupon reflects the adjusted face value you compute in each scenario, and that the yield to maturity remains constant at-0.5%. (c) Based on (b), what are the nominal and real holding period returns for the bond in the next year?

Answer 1

BOND PRICE = COUPON 1   + COUPON 2   + FACE VALUE

                           __________      ________        ___________

                          (1+YTM)¹           (1+YTM)²          (1+YTM)ⁿ

we will find present value of interest recieved for two years and face valueat the given YTM

interest coupon = 100*1% = 1$ annually

YTM = -0.005 i.e.0.5%

    = [1 / (1+-0.005)¹] + [1 / (1+-0.005)²] + [100 / (1+-0.005)²]

1/0.995 + 1/0.9900 + 100/0.9900

=1.005+1.010+101.01

=103.03 $ is current value of BOND.

=1012.16

=