Assume a TIPS bond, with semi-annual coupon payment, has a coupon rate of 2%, and 1.5 years to maturity and an initial principal of $1,000. The BEY spot rates to evaluate the bond are 2%, 3% and 4% for maturities .5, 1 and 1.5 years respectively. Furthermore, assume that the semi-annual inflation rates are 1.5%, 2% and 3% for the 3 semi-annual periods.
Calculate the following:
a. Calculate and draw a time line specifying the cash flows the investor would receive from the bond assume she holds it to maturity.
b. What is the annual BEY forward rates at t=0.5 (end of the first semi-annual)?
c. What is the bond dollar price and quote price (Round to the nearest 64th) per $1,000 at issue?
d. Assume the investor plans to buy 1 bond at beginning of the 2nd semi-annual at a quote price of 998-12+, reinvest the cashflow(s) at a BEY rate of 2% and hold the bond to maturity. What is the investor total return for this purchase?