If the Annual Real Rate on a 10-Year Inflation-Protected Bond

question 67

Multiple Choice

If the annual real rate on a 10-year inflation-protected bond equals 1.9 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.4 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?

• A)1.9 percent
• B)2.5 percent
• C)4.4 percent
• D)6.3 percent

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Definitions:

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since it was put into use.

Long-term Investments

Investments made with the intention of holding the asset for an extended period, typically exceeding one year, such as stocks, bonds, or real estate.

Net Income

The total profit of a company after all expenses, including taxes and costs, have been deducted from total revenue.

Dividends

Payments made by a corporation to its shareholders, usually as a distribution of profits.