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You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.
a.$30
b.$33
c.$32.78
d.$30.90

Respuesta :

jepessoa

Answer:

C) $32.78

Explanation:

Treasury Inflation Protected Securities (TIPS) are US treasury bonds that are indexed to inflation. That means that the coupon paid is adjusted to include the inflation rate.

coupon for year 3 = ($1,000 x 3%) x (1 + inflation rate year 1) x (1 + inflation rate year 2) x (1 + inflation rate year 3) = $30 x 1.02 x 1.03 x 1.04 = $32.78

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