Consider an investor who, on January 1, 2018, purchases a 10-year TIPS bond with an original principal of $100,000 and a 2.5% annual coupon rate.
a. It the semiannual inflation rate during the first six months is 0.6%, calculate the principal amount used to determine the first coupon payment and the first coupon payment.
b. From your answer to part (a), calculate the inflation-adjusted principal at the beginning of the second six months.
c. Suppose that the semiannual inflation rate for the second six months is 0.50%. Calculate the inflation-adjusted principal at the end of the second six months (on Dec 31, 2018) and the coupon payment to the investor for the second six month period.