Series 7 practice questionhardDebt Securities — US Government — TIPS Scenario
An investor purchases a TIPS with a par value of $1,000 and a 2% coupon rate. After one year, the CPI has increased by 3%. What is the semi-annual interest payment for the second year?
- A$10.00
- B$10.30✓ Correct answer
- C$20.60
- D$30.00
Explanation
Why B — $10.30
After one year, the inflation-adjusted principal is $1,000 x 1.03 = $1,030. The annual coupon is 2% of the adjusted principal: $1,030 x 0.02 = $20.60. Since interest is paid semi-annually, each payment is $20.60 / 2 = $10.30. TIPS adjust the principal for inflation while keeping the coupon rate fixed, so the dollar amount of each interest payment increases as the principal grows with inflation.
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