Exhibit 1-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Assume that during the past year the consumer price index increased by 1.5% percent and the securities listed below returned the following nominal rates of return.
$\begin{array}{l}
\text {Canadian T-bils } &2.75 \% \
\text {Canadian corporate bonds } &4.75 \%
\end{array}$
-Refer to Exhibit 1-5. If next year the real rates all rise by 10% while inflation climbs from 1.5% to 2.5%, what will be the nominal rate of return on each security?
A) 1.24% and 1.52%
B) 1.35% and 3.52%
C) 3.89% and 6.11%
D) 3.52% and 3.89%
E) 1.17% and 6.11%

Question

Exhibit 1-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Assume that during the past year the consumer price index increased by 1.5% percent and the securities listed below returned the following nominal rates of return.
 $\begin{array}{l}
\text {Canadian T-bils  } &2.75 \% \
\text {Canadian corporate bonds  } &4.75 \%
\end{array}$
-Refer to Exhibit 1-5. If next year the real rates all rise by 10% while inflation climbs from 1.5% to 2.5%, what will be the nominal rate of return on each security?
A) 1.24% and 1.52%
B) 1.35% and 3.52%
C) 3.89% and 6.11%
D) 3.52% and 3.89%
E) 1.17% and 6.11%

Quizplus · Accepted Answer

To calculate the new nominal rates of return, we first find the current real rates of return using the formula: $ \text{Real Rate} = \frac{\text{Nominal Rate} - \text{Inflation Rate}}{1 + \text{Inflation Rate}} $. For Canadian T-bills: $ \frac{2.75\% - 1.5\%}{1 + 1.5\%} $ and for Canadian corporate bonds: $ \frac{4.75\% - 1.5\%}{1 + 1.5\%} $. Then, increase these real rates by 10% and add the new inflation rate of 2.5% to find the new nominal rates. The correct calculation leads to the new nominal rates of 3.89% for T-bills and 6.11% for corporate bonds.

Exhibit 1-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Canadian T-bils 2.75%Canadian corporate bonds 4.75%\begin{array}{l}\text {Canadian T-bils } &2.75 \% \\\text {Canadian corporate bonds } &4.75 \%\end{array}Canadian T-bils Canadian corporate bonds ​2.75%4.75%​

Exhibit 1-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{l}\text {Canadian T-bils } &2.75 \% \\\text {Canadian corporate bonds } &4.75 \%\end{array}$