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 percent
B)2.7 percent
C)4.2 percent
D)5.7 percent

Question

Quizplus · Accepted Answer

To be as well off without inflation protection, one would need a real rate of return of 1.5 percent. This return is achieved when the nominal rate is 4.2 percent and the annual inflation rate is 2.7 percent,: i.e., 4.2 percent - 2.7 percent = 1.5 percent.

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