Practice Quiz

FINRA Series 6

Category - Series 6

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In 2008, Mr. Conservative bought a 1-year Treasury bill that was yielding 1.63%.The average annual rate of inflation in 2008 was 3.85%.In this case:
  1. Mr. Conservative earned a nominal return of +3.85% on his T-bill investment.
  2. Mr. Conservative earned a real return of -2.22% on his investment.
  3. Mr. Conservative earned a real return of +1.63% on his investment.
  4. Mr. Conservative earned a nominal return of +2.22% on his investment.
Explanation
Answer: B - If Mr. Conservative bought a 1-year Treasury bill in 2008 that was yielding 1.63%, and the average annual rate of inflation in 2008 was 3.85%, Mr. Conservative earned a real return of -2.22 % on his investment. In other words, he lost 2.22% in purchasing power since the dollars he received when the bill matured were worth less than the dollars he paid to buy the bill. Real return = nominal return - inflation rate = 1.63% - 3.85% = -2.22%.
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