Suppose You Buy an Inflation-Indexed Bond That Will Adjust with Inflation

question 53

Multiple Choice

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year.The nominal interest rate is 5 percent and the expected inflation rate is 3 percent.What is the present value of the bond? (Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)

• A)$65,000
• B)$70,000
• C)$74,000
• D)$75,000

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Definitions:

Goal Commitment

The determination and dedication an individual shows towards achieving their set objectives.

Feedback

Information provided about the result of an action or process, used as a basis for improvement.

Cognitive Reevaluation

Involves changing the way one thinks about a situation in order to alter its emotional impact.

Perceived Inequity

A feeling of unfairness experienced when individuals perceive that their ratio of efforts to rewards does not align with those of others.