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Unformatted text preview: 3 . e) What is the average return? f) How does it compare to the YTM? 2. You bought a newly issued Treasury Inflation Protected Security (TIPS) today at par. It has a real coupon rate of 5% and it matures in five years. The expected inflation rate for the next five years is given below. Complete the table: Year Inflation Nominal Face Value Real Face Value Nominal Coupon Payment Real Coupon Payment 1 1% 2 2% 3-2% 4-2% 5-2% a) At the maturity date, what nominal dollar amount will you receive? What is the deflation protection that is built into TIPS? b) Compare this to security to another security that was originally issued 20 years ago. Today, it has 5 years left to maturity. Assume that there was no deflation (only inflation) over the last 15 years. For both the old issued security and the newly issued security to trade, what would need to happen to the yield on the old issued security? Why?...
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This note was uploaded on 11/06/2011 for the course ECON V31.0231â taught by Professor Aditi during the Fall '11 term at NYU.
- Fall '11