If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is
A)-3 percent.
B)-2 percent.
C)3 percent.
D)7 percent.

Question

Quizplus · Accepted Answer

The real interest rate can be approximated using the Fisher equation: real interest rate ≈ nominal interest rate - inflation rate. Therefore, 7% - 4% = 3%.

If You Expect the Inflation Rate to Be 4 Percent