An Investor Purchasing an Inflation-Protected Bond with a Fixed Annual

question 157

Multiple Choice

An investor purchasing an inflation-protected bond with a fixed annual real return of 1.75 percent will earn a nominal annual return of ________ percent if the actual inflation rate turns out to be 3.25 percent.

• A)1.50 percent
• B)1.86 percent
• C)5.00 percent
• D)5.69 percent

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Definitions:

Compounded Monthly

A method of calculating interest in which the accrued interest is added to the principal sum every month, so that each subsequent interest calculation is based on a slightly higher amount.

Lifetime Interest

The total amount of interest that will be paid or earned over the entire life of a loan or investment.

Loan

A quantity of money that is lent and is supposed to be repaid along with an additional amount as interest.

Compounded Monthly

The process of calculating interest on both the initial principal and the accumulated interest from previous periods on a monthly basis.