TIPS Cash Flow Calculations

TIPS periodic coupon payments and their final redemption payments are both calculated using an inflation adjustment. Known as the inflation compensation, or IC, this is defined as in expression (12.2). 

The semiannual coupon payment, or interest, on a particular dividend date is calculated using equation (12.3). 

The principal repayment is computed as in expression (12.4). Note that the redemption value of a TIPS is guaranteed by the Treasury to be a minimum of 100 percent of the face value. 

CPIq = the base CPI level—that is, the level three months before the bond s issue date 

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