(Answered) Consider an alternative indexed bondsuppose that the bond

Economics

consider an alternative indexed bond.

Suppose that the bond costs $1000. One year later, the nominal principal of the bond is adjusted to be $1000*(1 + ∏ e ), where ∏ e is the expected inflation rate over the year. Then the bond pays off the adjusted principal of $1000*(1 +∏ e ) plus an interest payment of, say, 3% of the adjusted principal.

What is the one-year expected and actual real interest rate on the indexed bond?

Why is the real interest rate uncertain but the nominal interest rate known in this case?

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