Assume one investor bought a 10-year inflation-protected bond with a fixed annualreal rate of 1.5% and another investor bought a 10-year bond without inflationprotection with a nominal annual return of 4.2%. If inflation over the 10-year periodaveraged 2 %, which investor earned a higher real return?

Question

Business

Cole Everett

22 April, 17:47

Assume one investor bought a 10-year inflation-protected bond with a fixed annualreal rate of 1.5% and another investor bought a 10-year bond without inflationprotection with a nominal annual return of 4.2%. If inflation over the 10-year periodaveraged 2 %, which investor earned a higher real return?

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Answers (1)

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Quinn Manning · Answer 1

The second investor earned a higher return.

Explanation:

The first investor earns 1.5% for ten years. There is no discount of inflation because the interest rate is already protected.

In the other hand, and according to fisher, is necessary to discount the inflation to the nominal rate and that's going to be the real interest received by the second investor.

Real interest rate = Nominal - inflation

Real interest rate = 4.2% - 2% = 2.2% anual

Comparing both rates we find that

Real interest of investor 2 > Real interest of investor 1