You invest $5,000 in a 3-year bond paying 3.5%, and it turns out that inflation over...

Transcribed Image Text:

You invest $5,000 in a 3-year bond paying 3.5%, and it turns out that inflation over the three years averaged 2.5% per year. Including compounding effects, how much did you really earn over the three years? You invest $2,000 in a 5-year government bond that pays 3% interest. After one year, you check your interest rate screens and see that 4-year bonds are now paying 5% interest. If you went to sell your bond would you be able to get your $2,000 back? If not, roughly how much do you think you would get paid for your bond? If you see 2 government bonds, one with a maturity of 10 years and one with a maturity of 5 years, which would you expect to have a higher yield? You invest $5,000 in a 3-year bond paying 3.5%, and it turns out that inflation over the three years averaged 2.5% per year. Including compounding effects, how much did you really earn over the three years? You invest $2,000 in a 5-year government bond that pays 3% interest. After one year, you check your interest rate screens and see that 4-year bonds are now paying 5% interest. If you went to sell your bond would you be able to get your $2,000 back? If not, roughly how much do you think you would get paid for your bond? If you see 2 government bonds, one with a maturity of 10 years and one with a maturity of 5 years, which would you expect to have a higher yield?

Answer rating: 100% (QA)

Answer 1 To calculate the real return on your investment we need to take into account both the nominal return the interest rate and the inflation rate The real return is the nominal return minus the i... View the full answer