Question: Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000 and coupon rate of 5%. Assume annual coupon payments. Time Inflation

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000 and coupon rate of 5%. Assume annual coupon payments.

Time

Inflation in

Year just ended

Par Value

Coupon

Payment +

Principal

Re

Payment =

Total Payment

0

$1000.00

1

3%

$1030.00

$51.50

0

$51.50

2

2%

$1050.60

$52.53

0

$52.53

3

4%

$1092.62

$54.63

$1092.62

$1,147.25

What is the real rate of return on the TIPS bond in the first year?

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