Answered

Discover the answers you need at Westonci.ca, a dynamic Q&A platform where knowledge is shared freely by a community of experts. Experience the convenience of getting reliable answers to your questions from a vast network of knowledgeable experts. Connect with a community of professionals ready to help you find accurate solutions to your questions quickly and efficiently.

2) INFLATION-INDEXED TREASURY BOND Assume that the U.S. economy experienced deflation during the year and that the consumer price index decreased by 1 percent in the first six months of the year and by 2 percent during the second six months of the year. If an investor had purchased inflation-indexed Treasury bonds with a par value of $10,000 and a coupon rate of 5 percent, how much would she have received in interest during the year

Sagot :

hyderali230

Answer:

She received $490.05 during the year.

Explanation:

The principal of the bond will decrease in cash of decrease in the consumer price index.

The principal can be calculated as follow

Principal Value = ( Face value x Percentage reduction in consumer price index )

For the First Six Months

Principal Value = ( $10,000 x ( 100% - 1%  ) = $9,900

For the Last Six Months

Principal Value = ( $9,900 x ( 100% - 2%  ) = $9,702

Now calculate the coupon payments using the following formula

Coupon payments = Principal value x Coupon rate x Time fraction

For the First Six Months

Coupon payments = $9,900 x 5% x 6/12 = $247.50

For the Last Six Months

Coupon payments = $9,702 x 5% x 6/12 = $242.55

Total Interest received = Interest received in First Six Months + Interest received in Last Six Months = $247.50 + $242.55 = $490.05

Thanks for stopping by. We are committed to providing the best answers for all your questions. See you again soon. Thank you for choosing our platform. We're dedicated to providing the best answers for all your questions. Visit us again. We're dedicated to helping you find the answers you need at Westonci.ca. Don't hesitate to return for more.