If you expect the inflation rate to be 12 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)-5 percent.
B)-2 percent.
C)2 percent.
D)12 percent.

Question

Quizplus · Accepted Answer

The real interest rate can be approximated using the Fisher equation: real interest rate ≈ nominal interest rate - inflation rate. Here, it's 7% - 12% = -5%.

If You Expect the Inflation Rate to Be 12 Percent