Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 4% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 8% in each year.
a. What will be your cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What will be your cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What will be your real rate of return over the two-year period?