Question

Josh pays $3,000 for a Treasury Inflation-Protected Security that has an annual interest rate of three percent. By the end of the first year that he owns the bond, consumer prices have increased by 10 percent. After this adjustment, how much interest is he paid per year?

A. $99.00
B. $30.00
C. $66.00
D. $33.00

Answer 1

The interest paid to Josh after a 10% increase in consumer prices on his $3,000 TIPS with a three percent interest rate would be $99.00 annually, which makes the correct answer A. $99.00.

Step-by-step explanation:

If Josh pays $3,000 for a Treasury Inflation-Protected Security (TIPS) with an annual interest rate of three percent, and consumer prices increase by 10 percent by the end of the first year, the principal of the TIPS would be adjusted for inflation. This means the principal increases to $3,000 × (1 + 0.10) = $3,300. The interest that Josh is paid annually is then three percent of the new adjusted principal, which is $3,300 × 0.03 = $99.00 annually. Therefore, the correct answer is A. $99.00.