Question

Refer to the table below and calculate both the real and nominal rates of return on the TIPS bond in the second a not round intermediate calculations. Round your answers to 2 decimal places.) Principal and Interest Payments for a Treasury Inflation Protected Security Total Payment Inflation in Year Coupon Principal Time Just Ended Par Value Payment Repayment $1,000.00 1,028.00 $48.80 1,050.60 42.02 1,061.11 42.44 85,1 1,18%.53 0 40.80 42.02 1,061.11 nces Second Year Third Year Nominal return Real return

Answer 1

During Second Year Nominal Rate of return =42.02+(1050.60-1020)/1020

=7.12%

During Third Year Nominal Rate of return =42.44+(1061.11-1050.60)/1050.60

=5.04%

During Second Year Real Rate of return = {(1+Nominal Rate)/(1+ Inflation Rate)}-1

={1.0712/1.03}-1

= 4%

During Third Year Real Rate of return = {(1+Nominal Rate)/(1+ Inflation Rate)}-1

={1.0504/1.01}-1

= 4%

	Second Year	Third Year
Nominal return	7.12%	5.04%
Real return	4%	4%