Consider an investor woh, on January 1, 2017, purchases a TIPS bond with an original principal of $100,000, an 4.50 percent annual (or 2.25 percent semiannual) coupon rate, and 5 years to maturity.
a. If the semiannual inflation rate during the first six months is 1.25 percent, calculate the principal amount used to determine the first coupon payment and the first coupon payment (paid on June 30, 2017).
b. Form 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 (on December 31, 2017) and the coupon payment to the investor for the second six-month period. What is the inflation-adjusted principal on this coupon date?