If the annual real rate on a 10-year inflation-protected bond equals 1.9 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.4 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)1.9 percent
B)2.5 percent
C)4.4 percent
D)6.3 percent

Question

Quizplus · Accepted Answer

To be as well off without inflation protection, one would need a real rate of return of 1.9 percent. This return is achieved when the nominal rate is 4.4 percent and the annual inflation rate is 2.5 percent, i.e., 4.4 percent - 2.5 percent = 1.9 percent.

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