By Marks buys a one-year German government bond (called a bund)for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162.The nominal interest rate on the bond was ________,and the real interest rate was ________.

Question

Quizplus · Accepted Answer

Nominal interest rate = (total received amount - principal)/principal = ($436 - $400)/$400 = 0.09 or 9%
Real interest rate = [(1 + nominal interest rate)/(1 + inflation rate)] - 1 = [(1 + 0.09)/(1 + ((162-150)/150))] - 1 = 0.01 or 1%.
Therefore, the nominal interest rate on the bond was 9%, and the real interest rate was 1%.

By Marks Buys a One-Year German Government Bond (Called a Bund)for