Question

An inflation-indexed 3-year, annual 4% coupon bond issued by Thailand at par (Present Value =Par Value = 100 Thai Bhat initially). Inflation in Thailand increases by 5 % in year 1, by 4 % in year 2, and zero % in year 3. What is the coupon amount in Thai Bhat in year 2?

	a.	Bhat 4.37
	b.	Bhat 4.20
	c.	Bhat 5.00
	d.	Bhat 4.00

Answer 1

Answer - Option A (Bhat 4.37)

Calculation:-

Step 1 - Calculate Par value of bond in year 3 :-

Par value of bond = Par value (1 + Inflation rate)

Par value of bond of year 1 = 100(1.05) = Bhat 105

Par value of bond of year 2 = Par value of bond of year 1 (1 + Inflation rate)

Par value of bond of year 2 = 105(1.04) = Bhat 109.20

Step 2 - Calculate Coupon :-

Coupon in year 2 = Par value of bond of year 2 x Coupon rate

Coupon in year 2 = 109.20 x 4%

Coupon in year 2 = Bhat 4.37