What is the real interest rate

Reference no: EM13917710

1. Consider a risk-free bond paying today's purchasing power of $100 a year from now. This means that the bond will pay tomorrow an amount of money that suffices to buy a bundle of commodities that cost $100 today, so this is a real or inflation indexed bond. Suppose this bond costs $97.73. What is the real interest rate?

2. Suppose there is a second bond, paying two years from now the purchasing power that $100 has today. Suppose this bond costs $95.02 today. On the basis of these figures, is the real interest rate next year lower or higher than this year?

Reference no: EM13917710

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