CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
A government issues a 10-year inflation-indexed bond with a principal of 1,000 and a 2% annual coupon paid on the inflation-adjusted principal (capital-indexed). Inflation over the first year is 3%. The coupon paid at the end of year 1 is closest to:
The coupon is about 20.60. Capital-indexed principal rises to 1,030 after 3% inflation, and the 2% coupon applies to that adjusted amount. Using the original 1,000 gives 20.00, which ignores the adjustment.
- A20.00
- B20.60Correct
- C30.60
Explanation
Adjusted principal = 1,000 × 1.03 = 1,030. Coupon = 2% × 1,030 = 20.60. Using the unadjusted principal gives 20.00. 30.60 wrongly adds the inflation adjustment to the coupon.
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