a 10-year, capital-indexed bond linked to the Consumer Price index (CPi) is issued with a coupon rate of 6% and a par value of 1,000. The bond pays interest semi-annually. During the first six months after the bond's issuance, the CPi increases by 2%. on the First coupon payment date, the bond's:
A) coupon rate increases to 8%.
B) coupon payment is equal to 40.
C) principal amount increases to 1,020.

Question

Quizplus · Accepted Answer

The bond is capital-indexed, which means that the principal amount will increase according to the CPi. As the CPi increased by 2% in the first six months, the principal amount will also increase by 2%, from 1,000 to 1,020. The coupon rate and coupon payment are not affected by changes in the CPi, so options A and B are incorrect.

A 10-Year, Capital-Indexed Bond Linked to the Consumer Price Index