4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?
4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?
Chapter5: The Cost Of Money (interest Rates)
Section: Chapter Questions
Problem 7PROB
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