- CFA Exams
- CFA Exam: Level I 2021
- 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% (annual rate). The inflation adjustment to principal at the end of the first six months is ______.

B. $26,000

C. $32,000

A. $64,000

B. $26,000

C. $32,000

Correct Answer: C

Since the inflation rate is 3.2%, the semi-annual inflation rate for adjusting the principal is 1.6%. The inflation adjustment to principal is 2,000,000 x 0.016 = $32,000.

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**User Contributed Comments**
6

User |
Comment |
---|---|

o123 |
remember semi annual!! |

JKiro |
"inflation adjusted principal" vs. inflation- adjustment-to-principal |

magicchip |
D'OH. Semi annual. |

Emily1119 |
Why we use 3.2% but not 1.6%? |

2014 |
we did not used 3.2 in calculation. We used half of it since it is semi annual. 3.2 is annual inflation rate given in question |

CJPerugini |
Changes in the principle amount for TIPS are based solely on changes to the CPI. Because TIPS make coupon payments every 6 months, we need to adjust the annual CPI to its 6 month CPI. |