Question

If the annual real interest rate on a 10-year inflation-protected bond equals 2.7 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.2 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?Select one:a. 2.7 percentb. 1.5 percentc. 5.7 percentd. 4.2 percent

Answer 1

1.5%

Step-by-step explanation:

The computation of the inflation rate is shown below:

As we know that

Inflation rate = nominal interest rate - real interest rate

= 4.2% - 2.7%

= 1.5%

By deducting the real interest rate from the nominal interest rate we can get the inflation rate and the same is applied above i.e in the computation part by considering the nominal interest rate and the real interest rate