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A four-year TIPS bond promises a real annual coupon return 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 bond’s four-year term.
What will be the 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?

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