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

Question

Alison Lyons

Business

16 July, 01:27

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

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Answers (1)

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Adelyn Spence · Answer 1

1.5%

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