A real return bond has a coupon rate of 2.5% with an initial principal of $10,000. Since issuance, the economy has been experiencing a 2% inflation over a whole-year period. This bond has semi-annual coupon payments.
-How much interest does the bond pay during the second payment?

Question

Quizplus · Accepted Answer

The bond's principal adjusts with inflation, so after one period (six months), the new principal is $10,000 * (1 + 2%) = $10,200. The semi-annual coupon payment is then 2.5% / 2 * $10,200 = $127.50.

A Real Return Bond Has a Coupon Rate of 2