You are considering the choice between investing $50,000 in a conventional one-year bank GIC offering an interest rate of 7% and a one-year inflation-plus GIC offering 3.5% per year plus the rate of inflation.
a) Which is the safer (i.e. less risky) investment?
b) Which offers the higher expected return?
c) If you expect the rate of inflation to be 4% over the next year, which is the better investment? Why?
a. The Inflation-Plus GIC is safer because it guarantees the purchasing power of the investment. Using the approximation that the real rate equals the nominal rate minus the inflation rate, the GIC provides a real rate of 3.5% regardless of the inflation ...
The discussion is three paragraphs explained concepts and criteria. Which is safer is determined.