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?[A] $1,000[B] $1,060[C] $1,104[D] $1,160

Answer 1

C $1,104

Step-by-step explanation:

TIPS are the form of bonds which are specially designed for the purpose to protect the investors against the inflation.

The principal value of the bond in case of TIPS is adjusted for yearly inflation.

Based on the above discussion the value of TIPS bond can be calculated using the below formula:

Value of bond at maturity=Principal amount (1+inflation rate)^5

=1,000(1+2%)^5

=1,104

So the answer is C $1,104