If the annual real rate on a 10-year inflation-protected bond equals 1.9 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.4 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?
A)1.9%
B)2.5%
C)4.4%
D)6.3%

Question

Quizplus · Accepted Answer

The average rate of inflation that would make holders of both bonds equally well off is the difference between the nominal rate and the real rate, which is 4.4% - 1.9% = 2.5%.

If the Annual Real Rate on a 10-Year Inflation-Protected Bond