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?© BrainMass Inc. brainmass.com March 4, 2021, 8:23 pm ad1c9bdddf
a. In real terms, the expected rate of return on the nominal bonds is
(7% - 4%)/1.04 = 2.885%, which is less than ...
This posting answers the given problem regarding real vs. nominal interest rates.