Question

In which of the following situations would it be MOST advantageous to be buying bonds?

A. The nominal interest rate is 2 percent and the expected inflation rate is 2 percent
B. The nominal interest rate is 4 percent and the expected inflation rate is 7 percent
C . The nominal interest rate is 18 percent and the expected inflation rate is 17 percent. D. The nominal interest rate is 21 percent and the expected inflation rate is 23 percent. E. The nominal interest rate is 42 percent and the expected inflation rate is 46 percent

Answer 1

It would be most advantageous to buy bonds when the real interest rate is highest. Option C, with a nominal interest rate of 18 percent and an inflation rate of 17 percent, resulting in a real interest rate of 1%, provides the highest real return for bond buyers.

Step-by-step explanation:

It would be most advantageous to be buying bonds when the real interest rate is highest, which is the nominal interest rate minus the rate of inflation. Looking at the options provided:

• A. The nominal interest rate is 2 percent and the expected inflation rate is 2 percent - real interest rate is 0%.
• B. The nominal interest rate is 4 percent and the expected inflation rate is 7 percent - real interest rate is -3% (negative).
• C. The nominal interest rate is 18 percent and the expected inflation rate is 17 percent - real interest rate is 1%.
• D. The nominal interest rate is 21 percent and the expected inflation rate is 23 percent - real interest rate is -2% (negative).
• E. The nominal interest rate is 42 percent and the expected inflation rate is 46 percent - real interest rate is -4% (negative).

Comparing the real interest rates, option C, with a real interest rate of 1%, offers the highest real return on the purchase of bonds.