An inflation-indexed Treasury bond with a 5% coupon rate is issued at $1,000.If inflation in the year after issuance is 6%,

Question

Quizplus · Accepted Answer

Since the bond is inflation-indexed, the coupon rate and redemption value adjust to changes in inflation. The new redemption value will be the original value of $1,000 multiplied by 1 plus the inflation rate of 6%, which equals $1,060. The coupon rate, however, does not change, so it will remain at 5%. Therefore, the answer is B.

An Inflation-Indexed Treasury Bond with a 5% Coupon Rate Is