## (Solution Download) Consider a newly issued TIPS bond with a 3-year maturity, par value of \$1,000, and coupon rate of 4.

 Consider a newly issued TIPS bond with a 3-year maturity, par value of \$1,000, and coupon rate of 4.00%. Assume annual coupon payments.

 Time Inflation in Year Just Ended Par Value Coupon Payment + Principal Repayment = Total Payment 0 \$ 1,000.00 1 2.0 % \$ 1,020.00 \$ 40.80 0 \$ 40.80 2 1.0 % \$ 1,030.20 \$ 41.21 0 \$ 41.21 3 3.0 % \$ 1,061.11 \$ 42.44 \$ 1,061.11 \$ 1,103.55

What is the nominal rate of return on the TIPS bond in the first

year?

 3.00% 4.08% 6.08% 6.00%

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