Plz give the explaination in detail thanks You are considering the choice betwee
ID: 2735527 • Letter: P
Question
Plz give the explaination in detail thanks
You are considering the choice between investing $50,000 in a conventional one-year bank GIC offering an interest rate of 5 percent and a one-year inflation-plus GIC offering 1.5 percent per year plus the rate of inflation.
Which is the safer investment?
Which offers the higher expected return?
If you expect the rate of inflation to be 3 percent over the next year, which is the better invest- ment? Why?
If we observe a risk-free nominal interest rate of 5 percent per year and a risk-free real rate of 1.5 percent, can we infer that the market’s expected rate of inflation is 3.5 percent per year?
Explanation / Answer
1) One year bank GIC is safer investment. This is because one year GIC returns are fixed and will have lower beta than inflation plus GIC.
2) One year inflation plus GIC will have higher returns. As the risk is higher so expected returns will be higher due to high beta.
3) One year GIC is better as it will give higher returns with low risk which is 5%. inflation plus GIC will give 4.5%.
4) True. Nominal Interest rate= real interest rate+ inflation
5=1.5+inflation
inflation= 3.5%