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Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 4.5% paid annually. Assume you buy the bond at

Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 4.5% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 8.75% in each year.

a.What will be your cash flow in year 1?

b.What will be your cash flow in year 2?

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

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