coupon rate of 5 Assume annual coupon payment issued TIPS bo

coupon rate of 5%. Assume annual coupon payment issued TIPS bond with a 3-year maturity, par value of $1,000, and 3 Inflation in Time year just ended Coupon inirsal Total rpay ment Par value payment S10o0.00 S1030.00 S51.50 S1050.60 552.53 $1092.62 S54 63 2%. 0 S51.50 $52 53 S1.147.25 Slo 2.62 Wnn s the nominal rate of return on the TIPS bond in the first year? A) 8.15% B) 5.15% C) 5% D)9%

Solution

Amount invested at beginning of first year = $1000
Coupon received at the end of first year= $51.50
Increasse in value of principal = $30

Hence return = ($51.50+$30)/$1000=8.15%

Hnece option A is correct