$\text { Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you } \$ 1,500 \text { in real (inflation- }$adjusted) terms in one year.The nominal interest rate is 4 percent and the expected inflation rate is 2 percent.What is the present value of the bond? (Round off your answer to the nearest dollar and pick the answer closest to the one you calculate.)
A)$1,415
B)$1,442
C)$1,471
D)$1,530

Question

Quizplus · Accepted Answer

The real interest rate is approximately the nominal rate minus the inflation rate, which is 4% - 2% = 2%. The present value is calculated using the formula: $ PV = \frac{FV}{(1 + r)^n} $, where $ FV = 1500 $, $ r = 0.02 $, and $ n = 1 $. Thus, $ PV = \frac{1500}{1.02} \approx 1471 $.