You would like to invest $20,000 for a year in a risk-free investment. A conventional CD offers a 4.6% annual rate of return. You are also considering an “Inflation-Plus” CD which offers a real rate of return of 2.2% regardless of the inflation rate.

a. What is the implied (expected) inflation rate? (Round your answer to 2 decimal places.)

  Implied inflation rate %

b. You decide to invest $10,000 in the conventional and $10,000 in the “Inflation-Plus” CD. What is your expected dollar value at the end of the year?

  Expected value $

c. Which of the two CDs is a better investment if the actual inflation rate for the year turns out to be 2.2%?

Inflation-Plus CD turns out to be a better investment.

Conventional CD turns out to be a better investment.