If the annual real interest rate on a 10-year inflation-protected bond equals 1.5 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.2 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?
A)1.5%
B)2.7%
C)4.2%
D)5.7%

Question

Quizplus · Accepted Answer

The average rate of inflation that would make both bondholders equally well off is the difference between the nominal rate and the real rate, which is 4.2% - 1.5% = 2.7%.

If the Annual Real Interest Rate on a 10-Year Inflation-Protected