Question

An investor buys $100,000 in par value of tips with a coupon rate of 8%. inflation during the first six months is 2.4%. the first semi-annual coupon payment is closest to:

O $2,000.
O $2,048.
O $4,096.
O $8,192.

Answer 1

The first semi-annual coupon payment for an investor buying $100,000 in TIPS with a coupon rate of 8% is closest to $2,048.

Step-by-step explanation:

The first semi-annual coupon payment for an investor who buys $100,000 in par value of TIPS (Treasury Inflation-Protected Securities) with a coupon rate of 8% can be calculated as follows:

1. Calculate the coupon payment by multiplying the par value ($100,000) by the coupon rate (8%) and dividing by 2 since it's a semi-annual payment.
2. Convert the coupon payment amount to reflect the inflation rate by adding the inflation rate to 100% (to get the inflation multiplier).
3. Multiply the coupon payment with the inflation multiplier to get the adjusted semi-annual coupon payment.
4. Round the adjusted coupon payment to the nearest whole number.

Using this method, the first semi-annual coupon payment is closest to $2,048.