Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000 an
ID: 2783362 • Letter: C
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 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?
PLEASE SHOW ALL WORK FOR THUMBS UP
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
Explanation / Answer
Real Rate of return = Nominal Rate of return - Inflation
For the first year, Nominal Returns = 51.5 / 1000 = 5.15% and Inflation = 3%
=> Real rate of return for the first year = 5.15% - 3% = 2.15%
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