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One Year T-bill Offering Vs Index-Linked Inflation Plus T-bill

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You are considering a choice between investing $1,000 in a conventional one-year T-bill offering an interest rate of 8% and a one-year index-linked inflation plus T-bill offering 3% plus the rate of inflation.

a. Which is the safer investment?
b. Which offers the higher expected return?
c. What is the real return on the index-linked bond?

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Solution Summary

The expert examines one year T-bills offering versus index-linked inflation plus t-bills.

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a. The conventional one-year T-bill is the safer investment, because the return rate is fixed.

b. It is not clear ...

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