Which of the following investment opportunities produces the highest rate of return on a $25,000 investment? (After the third year, you get your $25,000 back -- guaranteed!). Assume that inflation is 5%, one-year Treasury Bonds pay 6%, investment grade corporate bonds pay 8% and junk bonds pay 12%.

A deal that pays nothing in the first two years and $3,200 at the end of the third year.

A deal that pays $1,000 in all three years.

A deal that pays $2,600 at the end of year 1, $200 at the end of both years 2 & 3.

A deal that pays $400 at the end of year 1, $1,000 at the end of year 2 and $1,600 at the end of year 3.

If you hold your savings in the form of nominal assets other than cash, you are a:

speculator

borrower

stockholder

lender

Why do bonds issued by the federal government pay a lower interest rate than bonds issued by, say, Intel Corporation.

This statement is not true. The bonds issued by the federal government pay an interest rate that is very close, if not identical, to the rate paid by large corporations.

The bonds of the federal government come with an extremely low (virtually non-existent) cost of default block for the lender.

Buyers of treasury bonds are more patriotic than other investors and therefore don't require that the federal government pay them as much as a corporation or other profit oriented entity.

This statement is not true. The bonds issued by the federal government pay an interest rate that is higher than the rate paid by large corporations.