Neco 2023 Economics Question 20

Practice objective / multiple choice question 20 from the 2023 Neco Economics examination.

Neco 2023 Economics Objective / Multiple Choice Medium Difficulty
Question 20 NECO • 2023 • ECONOMICS • objective

A 5‑year government bond pays a nominal interest rate of 8 % per annum, payable annually. The expected average inflation rate over the life of the bond is 3.5 % per annum. (i) Using the Fisher approximation, compute the expected real interest rate. (ii) Using the exact Fisher formula, compute the expected real interest rate. (iii) If an investor requires a real return of at least 4 % per annum, should the bond be purchased? Justify.

Answer Options

A. Approximate real rate = 5.0 %; exact real rate ≈ 4.9 %; since both exceed 4 %; the bond should be purchased.
Correct Answer B. Approximate real rate = 4.5 %; exact real rate ≈ 4.4 %; since both exceed 4 %, the bond should be purchased.
C. Approximate real rate = 4.5 %; exact real rate ≈ 4.4 %; since the approximate exceeds 4 % but the exact does not, the bond should be purchased with caution.
D. Approximate real rate = 4.5 %; exact real rate ≈ 4.4 %; since both are below 4 %; the bond should not be purchased.
Correct Answer
B
Correct Option:
Approximate real rate = 4.5 %; exact real rate ≈ 4.4 %; since both exceed 4 %, the bond should be purchased.

About This Question

This is Neco 2023 Economics Question 20. It is one of the objective questions from the 2023 Neco Economics examination.

Difficulty level: Medium .

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