You buy a $1,000 inflation-indexed Treasury security that pays 4 percent annual interest. Assume inflation is 5

Question:

You buy a $1,000 inflation-indexed Treasury security that pays 4 percent annual interest. Assume inflation is 5 percent in the first two years you own the security.
a. What is the inflation-adjusted value of the security after two years?
b. How much interest will be paid in the third year? The basis for computing interest is the inflation-adjusted value after year two.