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Indexed bonds make payments that are tied to some price index. Consider a newly issued bond...

Indexed bonds make payments that are tied to some price index. Consider a newly issued bond with a three-year maturity, par value of $1,000, and a 5% coupon paid annually.

  1. Complete the following table

Time

Inflation

Par Value

Coupon Payment

Par Value Payment

0

-

$1,000

-

-

1

4%

2

3%

3

2%
  1. Calculate the nominal and real returns for the second year and the third year.
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