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Author Question: We can get an average real rate if we assume expected inflation and actual inflation are on average ... (Read 151 times)

burchfield96

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on: Jul 10, 2018
We can get an average real rate if we assume expected inflation and actual inflation are on average the same ________.
 
  A) when we look over a relatively long period of time
  B) when we look over a relatively short period of time
  C) among different countries
  D) among neighboring countries

Question 2

James is a rational investor wishing to maximize his return over a 20-year period. The current yield curve is inverted with one-year rates at 5.00 and 20-year rates at 3.50. James will invest in the lower-rate 20-year bonds if:
 
  A) he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return.
  B) he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return.
  C) he thinks rates will remain flat at 5 in the future and locking in long-term rates today will prevent him from appearing greedy to those without this investment opportunity.
  D) he thinks rates will rise in the future and locking in long-term rates today may provide the highest long-run average return.


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upturnedfurball

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: A

Answer to Question 2

Answer: A
Explanation: A) Locking in low long-term rates today may be a successful strategy if long-term rates become even lower in the future. If rates are expected to rise in the future, then locking in the lower long-term rates now will result in a LOWER long-run average, which is NOT a rational decision.


burchfield96

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Reply #2 on: Jul 10, 2018
Correct answers!


upturnedfurball

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Reply #3 on: Jul 10, 2018
Great! Please up vote :D


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