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The federal government issues two four-year notes. The first is a traditional type of debt yield of 3% with the amount of interest being adjusted with changes in the CPI. The CPI was 100 when the notes were initially issued.

a) What is the annual amount of interest paid each year on each security if the CPI is as follows?

Year CPI

1 102

2 96

3 103

4 110

b) What is the amount of principal repaid at maturity by each note?

c) Using the dollar-weighted return , what is the nominal, annual rate of return on each security?

d) Based on the answer to part (c), which alternative produced the higher return and why?

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