BUS4027W Test 3.pdf (0,9 MB)
With regard to Q2 (iii): Reasons why there could be a negative real returns.
The reasons outlined in the memo make sense. However, I anticipated the main reason one would achieve negative real returns is due to inflation being higher than expected, after all, we have the following equation:
Nominal yield= Risk-free real yield + Expectations of future inflation + Inflation risk premium
From the above equation, it would seem that real yields would only be negative if the inflation exceeded the nominal yield. It seems the memo only considers demand factors causing yields to be negative.