Question

Suppose you buy a $100 government bond t hat is due next year. How much nominal inte rest will you receive if inflation is 4 percent o ver the year and the bond promises a real ret urn of 3 percent?

Answer 1

To calculate the nominal interest on a $100 government bond with a real return of 3 percent and an inflation rate of 4 percent, you add the real interest rate and the inflation rate. The nominal interest rate is 7%, which results in $7 of nominal interest received over the year.

Step-by-step explanation:

To calculate the nominal interest you will receive on a $100 government bond with a real return of 3 percent and an inflation rate of 4 percent, we need to understand the concept of nominal interest rate. The nominal interest rate is the sum of the real interest rate and the inflation rate. This can be represented by the formula:

Nominal Interest Rate = Real Interest Rate + Inflation Rate

In this case, we have:

• Real Interest Rate = 3%

• Inflation Rate = 4%

By adding these up, we get a nominal interest rate of:

3% + 4% = 7%

To find out how much nominal interest we will receive on the bond, we can use the following calculation:

Nominal Interest = Principal × Nominal Interest Rate

Substituting the numbers, we get:

Nominal Interest = $100 × 7% = $7

Therefore, if you buy a $100 government bond that promises a real return of 3 percent and the inflation is 4 percent over the year, you will receive $7 in nominal interest.