IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
Inflation is expected to be 6% per annum effective, and a bond provides a real yield of 2% per annum effective. What money effective annual yield does this imply, to two decimal places?
The money yield is 8.12% per annum. Multiply one plus the real rate by one plus inflation, 1.02 times 1.06 equals 1.0812, and subtract one. Adding 2% and 6% to get 8% omits the compounding cross-term of 0.12%, so it is wrong.
- A8.00%
- B4.00%
- C8.12%Correct
- D7.88%
- 12.00%
Explanation
The money rate is (1+real)(1+inflation)-1 = 1.02 x 1.06 - 1 = 0.0812, i.e. 8.12%. The 8.00% option simply adds the rates and misses the cross term 2% x 6% = 0.12%.
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