CFA Practice Question

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CFA Practice Question

Suppose a portfolio manager purchases $2 million of par value of a Treasury inflation protection security. The real rate is 2.6%. Assume that at the end of the first six months the CPI-U is 3.2%. The inflation-adjusted principal at the end of the first six months is ______.
A. $2,052,000
B. $2,064,000
C. $2,032,000
Explanation: The inflation adjustment to principal is $2,000,000 x 0.016 = $32,000. The inflation-adjusted principal is $2,000,000 + the inflation adjustment to principal = 2,000,000 + 32,000 = $2,032,000.

User Contributed Comments 6

User Comment
iceluke always half, because its semi-annually
Misah What is CPI-U stand for?
timbball Consumer Price Index for all Urban consumers
wink44 Its says the CPI-U is 3.2 for the first 6 months. CPI-U are computed by comparing the current CPI index to the base period. So you WOULD NOT need to divide it by two since the CPI is not a projected number but rather a month-by-month peg of inflation. This question states the inflation through the first 6 months of the year is 3.2%. Therefore the answer should be C.
CoffeeGirl wink44: you should always treat the rate as an annualized figure. 3.2% is an annualized figure and so it should be divided by 2.
ericczhang I believe it stands for the CPI associated with prices of goods purchased by urban consumers. Thus CPI-U.
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