Question #22
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 8
Status: Correct
Correct Answer: B
Question
Janet Grange's current one-period inter-temporal rate of substitution is 0.95. Janet is most likely to invest in a default-free inflation indexed one-period bond if:
Answer Choices:
A. The bond’s return is 4.89% or more
B. The bond’s return is 5% or more
C. The bond’s return is 5.26% or more
Explanation
Real risk-free rate = (1/E(inter-temporal rate of substitution)-1 = (1/0.95))-1 = 0.0526 or
5.26%