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A U.S. Treasury Inflation Protected Security has been issued with a real rate of 1.75%. In the first six months of the year inflation has equaled a 3% annualized rate. If the face value of the security is $10,000, what is the interest payment to the investor?
Correct Answer: A
A TIPS adjusts the principal value and then applies the real rate to that value for computing periodic interest payment. Adjusted principal value = 10,000 x (1 + 0.03/2) = $10,150 Interest payment for 1 st six months = (0.0175 / 2) x 10,150 = $88.81