Homework Help: Math

Posted by Antoinette on Wednesday, March 21, 2007 at 2:27pm.

Real versus Nominal Returns.

Do you think it is possible for risk-free Treasury bills to offer a negative nominal interest rate? Might they offer a negative real expected rate of return?

For conventional treasuries, the answer to the first question is no. People would just keep cash instead.

A different situation applies to Treasury Inflation Protected Securities (TIPS). They often trade above face value and with almost zero yield. People are willing to pay a premium for inflation protection, but usually this is done by paying more for the TIPS bond than its face value.

As for your second question, the answer is yes. Many US bond funds have been struggliong to provide a positive return lately, as yields were low and bond values were falling.

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