CFA Practice Question

There are 490 practice questions for this study session.

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 ______.

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.

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.
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