In January 2010, the U.S. Treasury issued a $1000 par, five-year, inflation-indexed note with a coupon of 5%. On the date of issue, the consumer price index (CPI) was 250. By January 2015, the CPI had decreased to 200. The coupon payment that was made in January 2015 is closest to:
A) $20
B) $25
C) $30
D) $40
A
Explanation: A) The CPI depreciated by 200/250 = 0.8. Consequently the principal amount of the bond decreases (for interest purposes) by this amount so the new principal = $1000 × 0.8 = $800. Therefore, with a 5% coupon and semiannual compounding this bond would pay $800 × .05/2 = $20
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