Assume one investor bought a 10-year inflation-protected bond with a fixed annual real rate of 1.5 percent and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2 percent. If inflation over the 10-year period averaged 3 percent, which investor earned a higher real return?
A)The investor who purchased the inflation protected bond.
B)The investor who purchased the bond without inflation protection.
C)Both investors earned the same real return.
D)Neither investor earned a positive real return.

Question

Quizplus · Accepted Answer

The inflation-protected investor earned a real return of 1.5 percent while the other investor earned a real return of 1.2 percent because the nominal return of 4.2 percent was reduced by the annual inflation rate of 3 percent: $4.2 percent - 3 percent = 1.2 percent.

Assume One Investor Bought a 10-Year Inflation-Protected Bond with a Fixed