1. Why is the number "1" added to each rate in the average annualized compounded return formulas?
To account for the original investment amount.
To eliminate negative rates.
To account for dividends.
2. In the beginning of 2017, a bonds yield to maturity is 7.40%. It includes a 1.90% inflation risk premium. In 2017, actual inflation in the economy was 2.10%. What is the bond's real rate of return in 2017? Ignore other risk factors. You expect to hold the bond until maturity.
7.40%
5.30%
7.60%
5.50%