John bought an inflation-indexed security for $10,000 in January 2014.The security promises an annual interest rate of 5 percent and makes payments twice a year.If the value of the inflation index in January 2014 was 106 and its value in July 2014 was 105, John will receive an interest income of______ .
A)?$504.76
B)?$226.40
C)?$182.72
D)$368.56

Question

Quizplus · Accepted Answer

To calculate the interest income, we need to first calculate the adjusted principal amount using the inflation indexes:

Adjusted principal in July 2014 = (106/105) * $10,000 = $10,047.62

Then, we can use the formula for semi-annual interest payments:

Interest income = (adjusted principal amount) * (interest rate/2)

= $10,047.62 * (0.05/2)

= $504.76

Therefore, the correct answer is A) $504.76.

John Bought an Inflation-Indexed Security for $10,000 in January 2014