Question

A ten-year, inflation-indexed bond has a par value of $10,000 and annual coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $_______. A) 250 B) 255 C) 500 D) 510 E) 210 Group of answer choices

Answer 1

Answer:

The correct answer is option (B).

Explanation:

According to the scenario, the given data are as follows:

Par value of bond = $10,000

Coupon rate Annual = 5%

So, Coupon rate semi annual = 2.5%

Inflation rate semi annual = 2%

So, we can calculate the coupon payment for six months by using following formula:

New par value of bonds after inflation = $10,000 + ( $10,000 × 2% ) = $10,200

So, Coupon payment = New par value × Coupon rate semi annual

= $10,200 × 2.5%

= $255