Question

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35) By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the bond was and the real interest rate was A) 9%; 1% B) 9%;-196 C) 36%,24% D) 36%; 12%

Answer 1

Purchase price of bond = $400

Amount received one year later = $436

Calculate the interest -

Interest = Amount received one year later - Purchase price of the bond

Interest = $436 - $400 = $36

The interest received is $36.

Calculate the nominal interest rate -

Nominal interest rate = (Interest/Purchase price of the bond) * 100

Nominal interest rate = ($36/$400) * 100 = 9%

The nominal interest rate is 9%.

Calculate the inflation rate -

Inflation rate = [(New CPI - Old CPI)/Old CPI] * 100

Inflation rate = [(162 - 150)/150] * 100 = 8%

The inflation rate is 8%.

Calculate the real interest rate -

Real interest rate = Nominal interest rate - Inflation rate = 9% - 8% = 1%

The real interest rate is 1%.

Hence, the correct answer is the option (A).