If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is
A)7 percent.
B)22 percent.
C)-15 percent.
D)-8 percent.

Question

Quizplus · Accepted Answer

The real interest rate is calculated as nominal interest rate - inflation rate.
Here, the nominal interest rate is the yield to maturity of 7% and the inflation rate is expected to be 15%.
Real interest rate = 7% - 15% = -8%
Therefore, the real interest rate on this bond is -8%, which means that the purchasing power of the principal amount invested in this bond will decrease by 8% after accounting for inflation.

If You Expect the Inflation Rate to Be 15 Percent