In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The principal payment that was made in January 2015 is closest to:

Question

Quizplus · Accepted Answer

The inflation-indexed note ensures that the principal payment is adjusted for changes in the CPI. The formula to calculate the adjusted principal value is:

Adjusted principal = (Original principal) x (CPI at maturity date) / (CPI at issue date)

Using the values given:

Adjusted principal = $1000 x (200/250) = $800

Therefore, the principal payment made in January 2015 would be $800. Choice B is the closest option to this value.