40. The interest rate on conventional 10-year Treasury bonds is 7% per year and the interest rate on 10-year TIPS (Treasury inflation-protected securities) is 3.5% per year. You have $10,000 to invest in one of them. a. If you expect the average inflation rate to be 4% per year, which bond offers the higher expected rate of return? b. Which would you prefer to invest in?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Real versus Nominal Interest Rates
40. The interest rate on conventional 10-year Treasury bonds is 7% per year and the
interest rate on 10-year TIPS (Treasury inflation-protected securities) is 3.5% per
year. You have $10,000 to invest in one of them.
a. If you expect the average inflation rate to be 4% per year, which bond offers the
higher expected rate of return?
b. Which would you prefer to invest in?
Transcribed Image Text:Real versus Nominal Interest Rates 40. The interest rate on conventional 10-year Treasury bonds is 7% per year and the interest rate on 10-year TIPS (Treasury inflation-protected securities) is 3.5% per year. You have $10,000 to invest in one of them. a. If you expect the average inflation rate to be 4% per year, which bond offers the higher expected rate of return? b. Which would you prefer to invest in?
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