<3> As discussed in class, Treasury Inflation-Protected Securities (TIPS) is a popular type of debt instrument:

a) What is a TIPS? How is it different from regular treasury securities.

b) Suppose you purchased a TIPS with a par value of $1 million. The coupon rate is 3.2%. Assume that the inflation in first six months is 3.6% (annual rate). Compute (i) inflation adjusted principal at the end of the first six months, (ii) the coupon payment at the end of the first six months.

c) Assume that the inflation in the second half year is 4.0% (annual rate). Compute (i) inflation adjusted principal at the end of the second six months, (ii) the coupon payment at the end of the second six months.

<4> Suppose the repo rate for a T-bond is 4.15%, and the haircut for an overnight repo is 2%. You plan to buy 100 T-bonds with $1K price per bond today, and sell it in the following day.

a) How much of the purchase price can you borrow by repoing out the bond? How much your own capital should be added to purchase the 100 T-bonds?

b) How much Repo interest will you have to pay tomorrow?

c) What bond prices tomorrow would have wiped out the margin (i.e., lose your own capital)?

PLEASE ANSWER BOTH