Question about TIPS

TIPS: Chapter 6.2.3

I see that when inflation rises by 2%, par value increases 2%.

Then, when deflation occurs, the par value should decrease by that amount.

However, in the spoiler, it only decreases by 20%.

Shouldn’t the par value drop to 960, and the semi-annual payment be $14.40?

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Actually, I think I just figured it out. In the first example, CPI increases 2% in 6 months. In the second example, CPI increases 4% in a year. So, the 2% increase is at the 6 month mark. The next 2% comes at the next interest payment… Is that right?

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Yes, @Gray - you’re right! I know it might seem written in a weird way, but I’m glad you’re paying attention to the details. You should be ready for questions that present CPI changes in either 6 month or 1 year increments.