The face value of Treasury Inflation-Protected Securities (TIPS) is tied to the Consumer Price Index (CPI) in the following way:

Ft = Ft-1 * (CPIt/CPIt-1)

coupon paymentt = coupon rate * Ft

Consider a newly-issued TIPS with two years to maturity, a face value of $1,000, and annual coupon payments with a coupon rate of 2%. The realized inflation rate is 1% over the first year. Assuming that the bond trades at par (today and in one year), what is the nominal return over the first year? What is the real return over the first year (the real rate of return is the rate adjusted for inflation)?