Taylor bought a 6 percent Treasury Inflation Protection Security that has a par value of $1,000 and an original Consumer Price Index (CPI) reference of 100

1. Taylor bought a 6 percent Treasury Inflation Protection Security that has a par value of $1,000 and an original Consumer Price Index (CPI) reference of 100. If the current CPI is 120, what is the adjusted par value and interest payment?

2. What is a zero-coupon bond and how does it work?

Expert Solution

1.

APar Value

= Par Value*current CPI/original CPI

=$1000*120/100

= $1200

Interest Payment = $1200*6% = $72

2.

A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.

Some bonds are issued as zero-coupon instruments from the start, while others bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than coupon bonds.

jeff jeffy answered 2 years ago

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