Question

Suppose an investor purchased a 10-year inflation-protected bond with a fixed annual real rate of 1.5%...

Suppose an investor purchased a 10-year inflation-protected bond with a fixed annual real rate of 1.5% and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2%. If inflation over the 10-year period averaged 2%, which investor earned a higher real return?

Select one:

a. Neither investor earned a positive real return.

b. The investor who purchased the inflation protected bond.

c. Both investors earned the same real return.

d. The investor who purchased the bond without inflation protection.

Homework Answers

Answer #1

Investor 1:

Inflation-indexed bond with a fixed annual real rate of return = 1.5%

Investor 2:

The nominal annual rate of return = 4.2%

Average annual inflation rate = 2%

The real annual rate of return = Nominal annual rate of return - Average annual inflation rate = 4.2% - 2% = 2.2%

As the real rate of return for investor 2 is higher than that of investor 1, investor 2 earned a higher real return.

Ans: d. The investor who purchased the bond without inflation protection

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
9. An investor purchased a 1‐year Treasury security with a promised yield of 10 percent. The...
9. An investor purchased a 1‐year Treasury security with a promised yield of 10 percent. The investor expected the annual rate of inflation to be 6 percent; however, the actual rate turned out to be 10 percent. What were the expected and the realized real rates of return for the investor? Please explain.
1. In Macroland, 500,000 of the 1 million people in the country are employed. Average labor...
1. In Macroland, 500,000 of the 1 million people in the country are employed. Average labor productivity in Macroland is $15,000 per worker. Real GDP per person in Macroland totals: 2. Suppose Tulane University purchases a new desk that was produced in the U.S. for use in the Economics Department office. Everything else held constant, this will cause the ________ component of U.S. GDP to increase. 3. If the annual real interest rate on a 10-year inflation-protected bond equals 1.7...
Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate...
Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.45%. If Janet sold the bond today for $982.47, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.
Last year Janet purchased a $1,000 face value corporate bond with a 10% annual coupon rate...
Last year Janet purchased a $1,000 face value corporate bond with a 10% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.85%. If Janet sold the bond today for $941.57, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.   %
Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate...
Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 7.95%. If Janet sold the bond today for $1,104.19, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.
Last year Janet purchased a $1,000 face value corporate bond with a 10% annual coupon rate...
Last year Janet purchased a $1,000 face value corporate bond with a 10% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.26%. If Janet sold the bond today for $1,008.42, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.
Last year, Joan purchased a $1,000 face value corporate bond with an 9% annual coupon rate...
Last year, Joan purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.19%. If Joan sold the bond today for $933.51, what rate of return would she have earned for the past year? Round your answer to two decimal places.
Last year, Joan purchased a $1,000 face value corporate bond with an 8% annual coupon rate...
Last year, Joan purchased a $1,000 face value corporate bond with an 8% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.08%. If Joan sold the bond today for $1,106.92, what rate of return would she have earned for the past year? Round your answer to two decimal places.
Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate...
Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 7.42%. if janet sold the bond today for $991.19, what rate of return would she have earned for the past year? round your answer to two decimal places.
Ten years ago the Templeton Company issued 29-year bonds with an 10% annual coupon rate at...
Ten years ago the Templeton Company issued 29-year bonds with an 10% annual coupon rate at their $1,000 par value. The bonds had an 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why the investor should or should not be happy that...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT