An investor purchasing an inflation-protected bond with a fixed annual real return of 1.75 percent will earn a nominal annual return of ________ percent if the actual inflation rate turns out to be 3.25 percent.
A)1.50 percent
B)1.86 percent
C)5.00 percent
D)5.69 percent

Question

Quizplus · Accepted Answer

The inflation-protected investor earned a real return of 1.75 percent. If the actual inflation rate was 3.25 percent then the nominal interest rate was 5 percent: 1.75 percent + 3.25 percent = 5 percent.

An Investor Purchasing an Inflation-Protected Bond with a Fixed Annual