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Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and...

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Finance

Consider a newly issued TIPS bond with a three yearmaturity, par value of $1000, and a coupon rate of 7%. Assumeannual coupon payments.

Time

Inflation in year just ended

Par Value

Coupon Payments

Principal Payment

Total Payment

0

$1000.00

1

3.0%

2

3.5%

3

4.5%

a) Fill in the shaded cells with amounts in the abovetable.

b) What is the nominal rate of return on the TIPS bondin the first year?

c)      What is the real rateof return on the TIPS bond in the first year?

Answer & Explanation Solved by verified expert
3.9 Ratings (590 Votes)
Part a The completed table is provided as follows Time Inflation in year just ended Par Value Coupon Payments Principal Payment Total Payment 0 100000 1 30 103000    See Answer
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Transcribed Image Text

Consider a newly issued TIPS bond with a three yearmaturity, par value of $1000, and a coupon rate of 7%. Assumeannual coupon payments.TimeInflation in year just endedPar ValueCoupon PaymentsPrincipal PaymentTotal Payment0$1000.0013.0%23.5%34.5%a) Fill in the shaded cells with amounts in the abovetable.b) What is the nominal rate of return on the TIPS bondin the first year?c)      What is the real rateof return on the TIPS bond in the first year?

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