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You would like to invest $15,000 for a year in a risk-free investment. A conventional certificate of deposit (CD) offers a 5.2% annual rate of
You would like to invest $15,000 for a year in a risk-free investment. A conventional certificate of deposit (CD) offers a 5.2% annual rate of return. You are also considering an Inflation-Plus CD which offers a real rate of return of 2.4% regardless of the inflation rate. |
a. | What is the implied (expected) inflation rate? (Round your answer to 2 decimal places.) |
Implied inflation rate | % |
b. | You decide to invest $7,500 in the conventional and $7,500 in the Inflation-Plus CD. What is your expected dollar value at the end of the year? |
Expected value | $ |
c. | Which of the two CDs is a better investment if the actual inflation rate for the year turns out to be 2.4%? | ||||
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