If the annual real interest rate on a 10-year inflation-protected bond equals 1.5 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.2 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?
A. 4.2 percent
B. 2.7 percent
C. 1.5 percent
D. 5.7 percent
Answer: B
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