Assuming the same coupon rate and maturity length, when the interest rate on a Real Return Bond is 3 percent, and the yield on a nonindexed Canada bond is 8 percent, the expected rate of inflation is ________.
A) 3 percent
B) 5 percent
C) 8 percent
D) 11 percent

Question

Quizplus · Accepted Answer

The difference between the interest rate on the Real Return Bond (3%) and the yield on a nonindexed Canada bond (8%) is called the breakeven inflation rate. Therefore, the expected rate of inflation is 8% - 3% = 5%.

Assuming the Same Coupon Rate and Maturity Length, When the Interest