- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 43. Fixed-Income Markets: Issuance, Trading, and Funding
- Subject 3. Sovereign Bonds, Non-Sovereign Bonds, Quasi-Government Bonds, and Supranational Bonds

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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.

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**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. |