Erin purchases a ten-year TIPS bond with a $25,000 face value. This particular issue pays semiannual coupons at a rate of the CPI + 125 basis points, with a floor of 5%.
CPI rates for the first three reset dates are 3.25%, 4.75%, and 5.25%.
The payout from this bond over the first three coupons is closest to?
The right answer is the one PassedTense (check mark logo) voted for.
The first coupon rate is 3.25% +
1.25% = 4.50%. That rate is floored up to 5.00%. The semiannual coupon payment
is 5.00% * $25,000 * 0.5 = $625. (Remember that as these are semiannual
coupons; the actual payment is half the annual amount.)
The second coupon rate is 4.75% +
1.25% = 6.00%. (The floor does not affect this rate.) The semiannual coupon
payment is 6.00% * $25,000 * 0.5 = $750.
The third coupon rate is 5.25% +
1.25% = 6.50%. (The floor does not affect this rate either.) The semiannual
coupon payment is 6.50% * $25,000 * 0.5 = $813.
The total payout then is $625 +
$750 + $813 = $2,188.
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