Question

You just buy a TIPS (Treasury Inflation-Protected Securities) which is inflation-indexed, has a face value of $1,000, 4% coupon rate, and a maturity of 3 years. Suppose for the following three years the inflation rate is 3%, 4%, and 5%, respectively. 1) What is your real cash flow in your holding period. 2) What is your nominal cash flow in your holding period. 3) What is the real return of the such investment in TIPS, suppose the selling price is $1,000 4) What is the nominal return of the investment, suppose that the selling price of the bond is quoted at 110

Answer #1

1) Real cash flow means cash flows after adjusting inflation

Year. CF. Inflation. Discounted cash flow

1. 40. 3%. 38.83

2. 40. 4%. 37.34

3. 40. 5%. 35.56

Total discounted cash flow = $111.73

2) Nominal cash flow means the cash flow without adjusting any inflation = 40+40+40 = $120

3) Real return on investment = Closing Inflow + Discounted inflow - Initial cash outflow/Initial cash outflow

= 1000+111.73-1000/1000 = 11.17 %

4) Nominal return on investment = 1100+120-1000/1000

= 22%

Suppose that you buy a TIPS (inflation-indexed) bond with a
1-year maturity and a coupon of 6% paid annually. Assume you buy
the bond at its face value of $1,000, and the inflation rate is
8%.
a. What will be your cash flow at the end of
the year?
b. What will be your real return?
c. What will be your nominal return?

The following questions are about Treasury Inflation Protected
Securities (TIPS).
(a) What is meant by the “real rate”?
(b) What is meant by the “inflation-adjusted principal”?
(c) Suppose that the coupon rate for a TIPS is 3%. Suppose
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Answer the below questions.
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pay a fixed interest rate for life.
pay a variable interest rate that is indexed to inflation but
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provide a constant stream of income in real (inflation-adjusted)
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have their principal adjusted in proportion to the Consumer
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provide a constant stream of income in real (inflation-adjusted)
dollars and have their principal adjusted in proportion to the
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1b.
Which one of the following is not a money...

Suppose you buy an inflation-indexed bond that will adjust with
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the present value of the bond? (Round to the nearest thousand
dollars and pick the answer closest to the one you calculate.)
A....

Treasury securities are issued and backed by the U.S. government
and, therefore, are considered to be the lowest-risk securities on
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With these securities, the face value (which is paid at maturity)
is regularly adjusted to account for inflation; however, the
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same.
You purchased a 10-year $10,000...

A. You buy a 10-year US Treasury Bond with a coupon interest
rate of 5% and Face Value of $1,000. You decide to sell your bond
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B. Calculate the Annualized Holding Period Return on the
investment. Show your work.

A. You buy a 10-year US Treasury Bond with a coupon interest
rate of 5% and Face Value of $1,000. You decide to sell your bond
four years later when market interest rates have fallen to 4%. Find
the selling price of the bond.
B. Calculate the Annualized Holding Period Return on the
investment. Show your work.

A $1,000 Treasury inflation-protected security is currently
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The following table shows $1,000 face value Treasury bonds and
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Bond #
Type
Maturity Length
Yield (%)
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Treasury Note
10-Year
4.05
2
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5.35
3
TIPS
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2.05
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Treasury Note
10-Year
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2
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