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?
a. In real terms, the expected rate of return on the nominal bonds is
(7% - 4%)/1.04 = 2.885%, which is less than ...
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