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So, I’m confused answer says coupon rate is NOT adjusted for inflation. Then second sentence of explanation says that it is? A little help with how this works please? Also what exactly is the real rate?
Many Thanks.
To answer your first question the rate would be the percentage. So the first part they are saying the percentage is fixed and the second part is saying the par value is changed periodically, so the amount is different. For example a 8% coupon on 100 par would give you $8 while the same percentage on 150 par value would give you $12.
You’re confusing the rate as opposed to the payment. The coupon rate itself is not adjusted for inflation; the actually coupon payment may be because the principal that gets adjusted. For example, if one year the principle is 900 and the coupon rate is 8%; the coupon payment will be $72; the next year the principal is adjusted for inflation lets say is 950; well 8 % of 950 will be more than 8% of 900; does that make sense?
Thank you!
Yes here ans is C, Because only par value adjusted for inflation that’s why we called them TIPS.
Coupon percentage is fixed but the real value adjust accordingly.