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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
| 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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