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In 2008, Mr. Conservative bought a 1-year Treasury bill that was yielding 1.63%. The average annual rate of inflation in 2008 was 3.85%. In this case:
Suggested Answer: B
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If Mr. Conservative bought a 1-year Treasury bill in 2008 that was yielding 1.63%, and the average annual rate of inflation in 2008 was 3.85%, Mr. Conservative earned a real return of -2.22 % on his investment. In other words, he lost 2.22% in purchasing power since the dollars he received when the bill matured were worth less than the dollars he paid to buy the bill. Real return = nominal return - inflation rate = 1.63% - 3.85% = -2.22%.
26 comments · newest first
SH
Shizue
6 months ago
I’m leaning towards A. But it doesn’t account for inflation.
EL
Elke
6 months ago
Definitely B. Negative real return hurts.
JA
Jacquline
6 months ago
Agreed! Inflation was higher than the yield.
CR
Crissy
7 months ago
I think the answer is B. Real return is crucial.
MA
Malissa
7 months ago
Totally agree, B is the right answer!
BR
Brande
7 months ago
Wait, how can he earn a positive return with inflation that high?
SH
Shawn
7 months ago
Definitely a real return of -2.22%!
LO
Louvenia
7 months ago
Inflation was higher than the yield, so he lost money.
BE
Belen
7 months ago
Mr. Conservative's T-bill yield was 1.63%.
AR
Arthur
8 months ago
Wait, so the real return is negative? Looks like Mr. Conservative needs to rethink his investment strategy. Maybe he should try the stock market next time.
CA
Cammy
8 months ago
Inflation rate of 3.85%? Ouch, that's a tough one. No wonder Mr. Conservative is not too happy with his investment.
HA
Harrison
8 months ago
Nominal return? Real return? This is making my head spin. I'll just go with B and hope for the best.
LU
Luann
9 months ago
I thought the answer was C, but I guess I was wrong. Real return is the way to go!
TW
Twana
9 months ago
Option B is correct. The real return is the nominal return minus the inflation rate, which is -2.22%.
AL
Aleta
9 months ago
I feel like this is similar to a practice question we did on nominal vs. real returns, but I can't recall the exact numbers we used.
JO
Josephine
9 months ago
If inflation was higher than the yield, then I guess Mr. Conservative must have a negative real return, right?
LE
Leeann
9 months ago
I think the nominal return is just the yield of the T-bill, which is 1.63%, but I’m confused about how inflation plays into that.
DO
Donte
9 months ago
I remember we discussed how to calculate real returns by adjusting for inflation, but I'm not entirely sure about the exact formula.
YU
Yun
10 months ago
I'm feeling pretty confident about this one. The real return is the nominal return adjusted for inflation, so B is the right choice.
ER
Erinn
10 months ago
No problem, I've got this. The real return is the nominal return minus the inflation rate, so option B is the correct answer.
SH
Shawnta
10 months ago
Wait, I'm a little confused. Is the real return the difference between the nominal yield and the inflation rate? Or is it something else?
NI
Nidia
10 months ago
Okay, I think I've got this. The key is to compare the nominal yield on the T-bill to the inflation rate.
CE
Cecil
10 months ago
Hmm, this looks like a tricky question about real vs. nominal returns. I'll need to think through the calculations carefully.
RO
Rolland
4 months ago
Yeah, I agree! It’s all about how inflation eats into those gains.
DO
Dorothy
4 months ago
I think the inflation rate really affects the real return here.
BE
Beata
6 months ago
This is definitely tricky! Real vs. nominal can be confusing.