If the Annual Real Interest Rate on a 10-Year Inflation-Protected

Multiple Choice

If the annual real interest rate on a 10-year inflation-protected bond equals 1.5 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.2 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?

A) 1.5 percent
B) 2.7 percent
C) 4.2 percent
D) 5.7 percent