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2. Suppose that you buy a TIPS (inflation-indexed) bond with a 3-year maturity and a coupon of 3% paid annually. You are buying the bond

2. Suppose that you buy a TIPS (inflation-indexed) bond with a 3-year maturity and a coupon of 3% paid annually. You are buying the bond at its face value, and the inflation rate is 2% in each year.

A. What will be your cash flows in year 1 and year 2?

B. What will be your cash flow in year 3?

C. What will be your real rate of return over the two-year period?

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