A real return bond with a 7 percent coupon will increase its interest payment annually to $71.40 if inflation rises by 2 percent.

Question

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A real return bond is designed to adjust its coupon payments based on changes in inflation, so if inflation increases by 2 percent, the coupon payment will increase by the same percentage, which would result in an interest payment of $71.40 (7% x 1.02 = 7.14%).

A Real Return Bond with a 7 Percent Coupon Will