Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation-adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year. The nominal interest rate is 5 percent and the expected inflation rate is 3 percent. What is the present value of the bond? (Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)
A. $65,000
B. $70,000
C. $74,000
D. $75,000
Answer: D
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