Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period. Which of the following statements regarding these investment options is true?
A) Investment option 1 has the highest nominal rate of return.
B) The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%.
C) Investment option 3 has the highest expected inflation rate and the lowest real rate of return.
D) Adjusted for inflation, investment option 1 is the best choice for Hugh.

Question

Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period.  Which of the following statements regarding these investment options is true?
A) Investment option 1 has the highest nominal rate of return. 
B) The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%. 
C) Investment option 3 has the highest expected inflation rate and the lowest real rate of return. 
D) Adjusted for inflation, investment option 1 is the best choice for Hugh.

Quizplus · Accepted Answer

We can see from the chart that investment option 1 has a nominal rate of return of 4% and an inflation rate of 2%, giving it a real rate of return of 2%. Investment option 2 has a nominal rate of return of 3% and an inflation rate of 1%, giving it a real rate of return of 2%. Investment option 3 has a nominal rate of return of 2% and an inflation rate of 3%, giving it a negative real rate of return of -1%.

Therefore, adjusted for inflation, investment option 1 has the highest real rate of return and is the best choice for Hugh.

Hugh Wallace Has the Following Information Regarding Three Investment Options