Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years.

Question:

Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If the inflation rate in recent years has been steady at 3 percent annually, what is the estimated real rate of interest? If the inflation rate during the next five years is 6 percent, what will happen to your real rate of return?