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. A four-year TIPS bond promises a real annual coupon return of 4 percent andits face value is $1,000. While the annual inflation rate was approximatelyzero when the bond was first issued, the inflation rate suddenly accelerated to3 percent and is expected to remain at that level for the bond’s four-year term.What will be the amount of interest paid in nominal dollars each year of thebond’s life? What will be the face (nominal) value of the bond at the end of eachyear of its life?

A four-year TIPS bond promises a real annual coupon return of 4 percent andits face value is$1,000. While the annual inflation rate was approximatelyzero when the bond was first issued,the…