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Question of the Week - Fixed Income

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited September 2015 in Level 1 Questions
Erin purchases a ten-year TIPS bond with a $25,000 face value. This particular issue pays semiannual coupons at a rate of the CPI + 125 basis points, with a floor of 5%. CPI rates for the first three reset dates are 3.25%, 4.75%, and 5.25%. The payout from this bond over the first three coupons is closest to?
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Question of the Week - Fixed Income 18 votes

$2,200
38%
ZeeAdaptPreprsparksYannickTparisamberjordanRichie321TheClaw 7 votes
$3,300
11%
gstyleMrMarais 2 votes
$4,400
50%
AcefromspaceMattyecoffey123sridharcwanthonyoneokUdigiulioclangerhferociouspabulums 9 votes

Comments

  • $4,400
    What is the right answer
  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    $2,200
    The right answer is the one PassedTense (check mark logo) voted for.

    The first coupon rate is 3.25% + 1.25% = 4.50%. That rate is floored up to 5.00%. The semiannual coupon payment is 5.00% * $25,000 * 0.5 = $625. (Remember that as these are semiannual coupons; the actual payment is half the annual amount.)

    The second coupon rate is 4.75% + 1.25% = 6.00%. (The floor does not affect this rate.) The semiannual coupon payment is 6.00% * $25,000 * 0.5 = $750.

    The third coupon rate is 5.25% + 1.25% = 6.50%. (The floor does not affect this rate either.) The semiannual coupon payment is 6.50% * $25,000 * 0.5 = $813.

    The total payout then is $625 + $750 + $813 = $2,188.

    PassedTense
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  • edited November 2015
    @PassedTense Since TIPS is capital indexed bonds. So we need to adjust principal value in each period and then calculate for the coupon in each period right?
    It's slightly more than 2,200. It would be the same answer anyway.
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