An inflation-indexed Treasury bond has a par value of $1,000 and a coupon rate of 2...
An inflation-indexed Treasury bond has a par value of $1,000 and a coupon rate of 2 percent.
An investor purchases this bond and holds it for one year. During the year, the consumer price
index increases by .25 percent every six months. What are the total interest payments the
investor will receive during the year
Homework Answers
With Inflation indexed bonds, the value of bond gets adjusted for the inflation
Inflation adjusted value of bond after half year = 1000 * (1 + 0.25%)
= 1002.50
Coupon paid at half year = 1002.50 * 2%/2 = 10.025
Inflation adjusted value of bond after half year = 1002.50 * (1+0.25%) = 1005.06
Coupon paid at year 1 = 1005.06 * 2%/2 = 10.05
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