Which of these is a component of the interest rate on a 10-year inflation indexed US government bond?

A.)Risk that the borrower will default
B.)Positive rate of time preference
C.)Expected inflation rate
D.)general uncertainty about the future

The correct answer is C) Expected inflation rate.

To determine this, you need to understand the factors that influence the interest rate on a 10-year inflation-indexed US government bond. Let's break it down:

A) Risk that the borrower will default: This is typically associated with credit risk, which is more relevant for corporate bonds or bonds issued by entities that may have a higher likelihood of defaulting. In the case of a government bond, there is generally a lower risk of default because the issuer is the government, which possesses the ability to tax or print money to fulfill its obligations. However, this factor is not a component of the interest rate on this specific bond.

B) Positive rate of time preference: Time preference refers to the idea that individuals prefer to have goods or services sooner rather than later. It is not directly related to the interest rate on a bond, particularly an inflation-indexed government bond. Therefore, this factor is also not a component of the interest rate in this case.

C) Expected inflation rate: The interest rate on an inflation-indexed government bond is influenced by the expected inflation rate. An inflation-indexed bond is designed to adjust its principal and interest payments based on changes in inflation. Therefore, the interest rate on this bond will include compensation for expected inflation, as investors want to preserve their purchasing power.

D) General uncertainty about the future: While uncertainty about the future may play a role in investors' decisions, it is not explicitly considered a component of the interest rate on a specific bond. The interest rate on a bond reflects market expectations, including the expected inflation rate, but general uncertainty is not directly factored into the interest rate.

In summary, the correct component of the interest rate on a 10-year inflation-indexed US government bond is C) Expected inflation rate.