Question

1. Suppose a portfolio manager purchases 100 000 USD par values Treasury inflation protected security. The real rate determined by auction is 2,8%.
   1. Assume that at the end of first 6 months the CPI is 2,6% (annual rate). Compute
      1. Inflation adjustment to the principal after end of first 6 months

2. Inflation adjusted principal after end of first 6 months

3. The coupon payment to the investor at the end of first 6 months

Answer 1

Treasury inflation protected security = 100 000 USD

Real rate determined by auction = 2.8%

Assume, at the end of first 6 months the CPI is 2.6%

Therefore,

i) Inflation adjustment to the principal at the end of first 6 months

100,000 * 0.013 = 1,300 USD

ii) Inflation adjusted principal after end of first 6 months,

100,000 * 1.013 = 101,300 USD

iii) Coupon payment to the investor at the end of first 6 months,

= 1/2 of the real rate * inflation adjusted principal at the coupon payment date

=101,300 * 0.014 = 14,182 USD