Let's have a look at TIPs coupons. Lindsay buys tips with a $10,000 face value and a two and a half percent semi-annual coupon. The CPI then increases by half a percent, so we have half a percent inflation. What is the adjusted principle value of Lindsay's tips and how much is Lindsay's coupon payment? Well, we know what the beginning principle was, 10,000. The coupon is 2.5%. We have inflation of 0.5%, so we can now figure out what the adjusted principle is.

One plus the 0.5% times the original principle is the new adjusted principle.

The coupon payment will still be 2.5%. It's semi-annual, so divide that by 2, but it's now applied to the adjusted principle, so Lin's coupon would be 125.6 thanks to inflation.

The next year, CPI increases by 0.25%. What is the adjusted principle value of Lindseys's tips? Now, how much is the next coupon payment that Lindsey receives? Well, the beginning principle in this case is of course, where we left it in the first question.

The coupon is still 2.5%. However, we've had another increase in inflation, 0.25% inflation.

So the adjusted principle now is the beginning principle in this time period, times 1 plus the inflation in that period, so higher again at $10,075.10. The coupon payment again is the fixed 2.5%. It's semi-annual, so divide by 2 times the adjusted principle. So the coupon payment in the second period here for Lindsey is 125.9. She's getting a higher coupon thanks to inflation.