Question

If the rate of inflation remains the same at 2% during the 5-year life of a TIPS bond with a coupon of 3%, what would the nominal value of the bond be at maturity to the nearest dollar?

Answer 1

$1,104( one thousand, one hundred and four United states of America Dollar).

Explanation:

Treasury Inflation Protection Securities (TIPS) is used for adjust the principal value of the bond yearly for inflation.

The coupon rate which is also known as the interest rate remains fixed.

Calculating the future value using compounding through;

Future Value or nominal value

= Principal x (1 + the inflation rate)^( number of years).

Therefore,

X = $1,000 x (1+.02)^5

= $1,104.