On January 1st of the year, an investor purchases $100,000 in par value of a new Treasury Inflation Protection Security (TIPS) issue that has a 2.5% coupon rate. The annual rate of inflation over the first six months of the year is 4.0% and the annual rate of inflation for the second six months of the year is 3.0%. The amount of coupon interest paid to the investor after the second six months of the year is closest to:
B is correct because the inflation-adjusted principal after the second six month period is $100,000 × (1.02) × (1.015) = $103,530 and $103,530 × (2.5%/2) = $1,294.