Bonds are default free and have the same market price

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Reference no: EM131615931

You are graduating in two years. You want to invest your current savings of $5,900 in bonds and use the proceeds to purchase a new car when you graduate and start to work. You can invest the money in either bond A, a two-year bond with a 3.06 percent annual interest rate, or bond B, an inflation-indexed two-year bond paying 1.04 percent real interest above the inflation rate (assume this bond makes annual interest payments). The inflation rate over the next two years is expected to be 1.55 percent. Assume that both bonds are default free and have the same market price. Which bond should you invest in?

Nominal interest rate for Bond A %

Nominal interest rate for Bond B %

Invest in Bond B or Bond A

Reference no: EM131615931

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