1. TIPS Capital Return Consider a 4.00% TIPS with an issue CPI reference of 185.80. At the beginning of this year, the CPI was 198.60 and was at 203.70 at the end of the year. What was the capital gain of the TIPS in dollars? (Round your answer to 2 decimal places.)
a) $17.90
b) $27.45
c) $5.10
d) $12.80
2. Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 8.80 percent, and the 6-year Treasury rate is 9.20 percent. From discussions with your broker, you have determined that expected inflation premium is 3.75 percent next year, 3.15 percent in Year 2, and 4.10 percent in Year 3 and beyond. Further, you expect that real interest rates will be 4.20 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
a) .50%
b) .90%
c) 1.25%
d) 1.85%