Question

You purchase a Treasury inflation-protected note with an original principal amount of $1,000,000 and a 2.8% annual coupon (paid semiannually). What will the first coupon payment be if the semiannual inflation over the first 6 months is 1.4%?

Answer 1

Answer:

$14,159.60

Explanation:

Inflation-adjusted principal = Principal * (1+inflation)

Inflation-adjusted principal = 1,000,000 * (1+1.14%)

Inflation-adjusted principal = 1,000,000 * 1.0114

Inflation-adjusted principal = $1,011,400

Now, the coupon rate is given as 2.8% or 1.4% semi annually.

Coupon Payment = Coupon rate * Inflation-Adjusted Principal

Coupon Payment = 1.4% * $1,011,400

Coupon Payment = $14,159.60

Therefore, the first coupon payment is $14,159.60