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A four-year TIPS bond promises a real annual coupo...

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A four-year TIPS bond promises a real annual coupon return of 4 percent and its face value is $1,000. While the annual inflation rate was approximately zero when the bond was first issued, the inflation rate suddenly accelerated to 3 percent and is expected to remain at that level for the bond?s four-year term. What will be the amount of interest paid in nominal dollars each year of the bond?s life? What will be the face (nominal) value of the bond at the end of each year of its life?,So with the inflation rate accelerated to 3 percent it makes no change to the nominal value of the bond making the bonds value $1000 for each year? This would make the interest paid each year the same dollar amount? Is this correct or am I confused?

 

Paper#5720 | Written in 18-Jul-2015

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