Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the average annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was _____, instead of the _____ return that Emmel expected ex-ante.

Question

Quizplus · Accepted Answer

The ex-post rate of return, considering the actual inflation rate of 1.5%, is 1.5% (3% interest rate - 1.5% inflation rate). Emmel expected a 2.5% return ex-ante (3% interest rate - 0.5% expected inflation rate).

Emmel Is the CFO for ABC Corporation