Individual C purchases a TIPS (Treasury Inflation Protected Security) with a face value of $1, 000. This is the purchase price as well. It has a coupon rate of 2% which is paid semi-annually.
The next coupon payment will be in exactly 6 months. The TIPS has 1 year to maturity. At the time of the purchase the price index (PI) Is 125 (PIo = 125).
At the end of six months, PI1 = 130. At the end of one year, the PI2 =135. Calculate the interest payment for the first 6 month period.
Calculate the interest payment after the second 6 month period. Show the equation with numbers to find the unknown semi-annual yield on the security.
Then, indicate how you would use the unknown semi-annual yield to get the APR.