IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
A conventional 1-year zero-coupon bond yields 8.00% per annum effective, while a 1-year zero-coupon index-linked bond with no indexation lag yields a real rate of 3.00% per annum effective. Using the Fisher relationship, what is the implied annual inflation rate, to two decimal places?
Implied inflation is 4.85% per annum, found from 1+e = 1.08/1.03 = 1.0485. Simply subtracting 3% from 8% to get 5.00% ignores the compounding interaction between real yield and inflation.
- A5.00%
- B4.85%Correct
- C5.15%
- D11.24%
- 3.00%
Explanation
Fisher: (1+i) = (1+r)(1+e). So 1+e = 1.08/1.03 = 1.048544, giving e = 4.85%. The 5.00% option subtracts the rates directly, ignoring compounding.
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