Question

A Treasury Inflation Protection Security was issued with a 3.10% coupon rate. The semi-annual inflation rates over the next 4 six month periods is 1%, 0%, 3% and -1% respectively. What is the coupon interest payment in the 4th period if the original principal was $1,000,000?

a) $15.345
b) $31,927
c) $15,963
d) $11,799

Answer 1

The coupon interest payment in the 4th period is -$31,000.

Step-by-step explanation:

To calculate the coupon interest payment in the 4th period, we need to calculate the coupon interest payment for each period based on the coupon rate and inflation rate. The coupon interest payment for each period is calculated as follows:

Period 1: Coupon interest payment = Coupon rate x Principal = 3.10% x $1,000,000 = $31,000

Period 2: Coupon interest payment = Coupon rate x Principal = 3.10% x $1,000,000 = $31,000

Period 3: Coupon interest payment = Coupon rate x Principal x Inflation rate = 3.10% x $1,000,000 x 1% = $31,000

Period 4: Coupon interest payment = Coupon rate x Principal x Inflation rate = 3.10% x $1,000,000 x -1% = -$31,000

Therefore, the coupon interest payment in the 4th period is -$31,000.