Problem:
Consider a 3.80 percent TIPS with an issue CPI reference of 189.2. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.1. For the interest payment in the middle of the year, the CPI was 198.7. Now, at the end of the year, the CPI is 203.2 and the interest payment has been made.
Requirement:
Question 1: What is the total return of the TIPS in dollars?
Question 2: What is the total return of the TIPS in percentage?
Note: Provide support for your underlying principle.