Question

Long-term (nominal) U.S. Treasury Bonds ------------ in the short-to-medium term.

Short-term (nominal) U.S. T-Bills ----------  in the short-to-medium term.

U.S. stocks ----------  in the short-to-medium term.

Options for blanks:

Provide no/zero protection against inflation

Provide good protection against inflation

Are exported to inflation

Suppose that your investment strategy is to buy a 15-year Treasury Inflation Protected Security (TIPS), hold it for 1 year, then sell it and buy another 15-year TIPS. You plan to repeat this process until you retire (in 45 years). This investment strategy generally provides better inflation protection in the short- and medium-term relative to an investment in:

	A.	Short-term (1 month) U.S. government bonds (held to maturity, then rolled over to another bond)
	B.	Long-term (10 year) U.S. government bonds (held for one year, then rolled over to another bond)
	C.	U.S. stocks (the market portfolio)
	D.	Option A and B
	E.	Option A and C
	F.	Option B and C
	G.	Options A, B and C

Why does a short-term (say one-month) U.S. government bond provide a better protection against inflation relative to a long-term U.S. government bond?

	A.	The yield-to-maturity on a short-term government bond is given by the real YTM and expected inflation. In contrast, for a long-term bond the YTM does not reflect expected inflation.
	B.	Short-term government bonds are less exposed to interest-rate risk.
	C.	Actual inflation is likely to track expected inflation very closely of short horizons.
	D.	Option A and B
	E.	Option A and C
	F.	Option B and C
	G.	Options A, B and C.

Answer 1

Fill in the blanks

1. Long-term (nominal) U.S. Treasury Bonds Are exported to inflation in the short-to-medium term.

2. Short-term (nominal) U.S. T-Bills Provide good protection against inflation in the short-to-medium term.

3.U.S. stocks Provide no/zero protection against inflation in the short-to-medium term.

4. Option A

A .Short-term (1 month) U.S. government bonds (held to maturity, then rolled over to another bond) and

5. G.  Option A ,B and C