Question #24
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
The price of a zero-coupon, inflation indexed, risk-free bond that pays $1 in one period is:
Answer Choices:
A. Uncertain
B. The expected value of the investors’ inter-temporal rate of substitution between current period and one period from now
C. $1.00
Explanation
The price of a The price of a zero-coupon, inflation indexed, risk-free bond that pays $1 in
one period is the expected value of the investors' inter-temporal rate of substitution
between current period and one period from now. This value is less than $1 as the utility
of current consumption is greater than consumption in one period in the future.