Fixed Income Course - This is all one question. The following questions are about TIPS. a. What is meant by the “real rate”? b. What is meant by the “inflation-adjusted principal”? c. Suppose that the...

Fixed Income Course - This is all one question.

The following questions are about TIPS.
a. What is meant by the “real rate”?
b. What is meant by the “inflation-adjusted
principal”?
c. Suppose that the coupon rate for a TIPS is
3%. Suppose further that an investor purchases
$10,000 of par value (initial principal) of this
issue today and that the semiannual inflation
rate is 1%.
1. What is the dollar coupon interest that
will be paid in cash at the end of the first
six months?
2. What is the inflation-adjusted principal at
the end of six months?