Intro

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 4%. Assume annual coupon payments and that the bond trades at par throughout its life.

Year	Inflation	Par Value	Coupon
0		$1,000.00
1	5%	$1,050.00	$42.00
2	2%	$1,071.00	$42.84
3	3%	$1,103.13	$44.13

Attempt 1/1 for 10 pts.

Part 1

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

9.00%

4.00%

9.20%

5.40%