Chapter 5, Problem 6PS

A

Summary Introduction

To determine: The safer investment between a conventional one-year bank CD offering an interest rate of 5%, and one year inflation-plus CD offering 1.5% per year is to be determined.

Introduction:

The real interest rate is defined as the rate of interest which an investor or saver receives after allowing for the inflation.

B

Summary Introduction

To determine: The offer with higher expected return is to be determined.

Introduction: The real interest rate is defined as the rate of interest which an investor receives after allowing for the inflation.

C

Summary Introduction

To determine: The better investment is to be determined when expected rate of inflation over the next year is 3%.

Introduction:

The real interest rate is defined as the rate of interest which an investor or saver receives after allowing for the inflation.

D

Summary Introduction

To determine: It is to be determined that expected rate of inflation can be 3.5 % per year when risk free nominal interest rate of 5% per year and the risk free real rate of 1.5% on inflation-indexed bonds.

Introduction:

The real interest rate is defined as the rate of interest which an investor or saver receives after allowing for the inflation.