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

question 27

Multiple Choice

If the annual real interest rate on a 10-year inflation-protected bond equals 1.5 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?

• A)1.5%
• B)2.7%
• C)4.2%
• D)5.7%

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