Indexed bonds and inflation uncertainty In Chapter 14, in a Focus Box titled The Vocabulary of Bond

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Indexed bonds and inflation uncertainty In Chapter 14, in a Focus Box titled "The Vocabulary of Bond Markets," the concept of an inflation-indexed bond was introduced. Although such bonds are typically long in maturity, the example that follows compares a standard one-year Treasury bill with an inflationindexed one-year Treasury bill.

a. A standard one-year $\$ 100$ treasury bill promises to pay $\$ 100$ in one year and sells for $\$ P_{B}$ (notation is from Chapter 4) today. What is the nominal interest rate on the treasury bill?

b. Suppose that the price level is $P$ today and $P(+1)$ next year and the bill sells for $\$ P_{B}$ today. What is the real interest rate on the Treasury bill?

c. An indexed Treasury bill pays a larger payment next year to compensate for inflation between the date of issue and the date of payment. If the bill is issued today when the price index is 100 , what will be the payment next year if the price index has risen to 110 ? What is the real interest rate on an indexed Treasury bill that sells for $\$ P_{B}$ today?

d. If you are an investor, will you want to hold indexed or non-indexed bonds?

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