A 4-Year TIPS Government Bond Promises a Real Annual Coupon

Essay

A 4-year TIPS government bond promises a real annual coupon return to investors of 4 percent and its face value is $1,000. While the annual inflation rate was approximately zero when the bond was first issued, the inflation rate suddenly accelerated to 3 percent and is expected to remain at that level for the 4-year term of the bond. What will be the approximate amount of interest paid in nominal dollars each year of the bond's life? What will be the face (nominal) value of the bond at the end of each year of its life?