Randy bought a zero coupon bond and a TIPS 5 years ago for $2,500 each. Both had 10 years to maturity. The TIPS's coupon was 2% while the zero coupon bond will be redeemed for $3,000. What should the maximum real value of his bonds be if he tries to sell them today?
Zero coupon bonds do not earn interest. It is usually sold at a big discount and its redeemable value if beyond its face value will only be redeemed once it reaches maturity.
TIPS stands for Treasury Inflation Protected Securities.
TIPS: 2,500 x 2% x 5 years = 250 2,500 + 250 = 2,750
Zero coupon bond after 5 years: 2,500
Maximum real value of his bonds if he sells them today.
