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Thefaith_123.
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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?- $2,200
- $3,300
- $4,400
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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. -
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