Consider an inflation protected bond with a current principal value of $1000 that pays an annual 5% real return.

a. If inflation is 3% this year, what is the interest payment made at the end of the year?

b. If inflation is 2% more the following year (so that there was a year of 3% inflation followed by a year of 2% inflation), what is the principal value of the bond at the end of the second year?