9. During the first week of May 2008, the nominal interest rate on 30-year fixed-rate mortgage loans as reported by the Wall Street Journal was 6 percent per year. (a) Suppose that the inflation rate in the United States turns out to be 3 percent per year, on average, over the next 30 years. What will the real interest rate on these mortgage loans be in this case? (b) Suppose that, instead, US inflation turns out to be 5 percent per year, on average, over the next 30 years. What will the real interest rate on mortgage loans be in this case? (c) Who "wins," in the sense of being better off financially, if inflation turns out to be 5 percent instead of 3 percent: the households who take out new mortgage loans today at 6 percent, or the banks that make new mortgage loans today at 6 percent?
9. During the first week of May 2008, the nominal interest rate on 30-year fixed-rate mortgage loans as reported by the Wall Street Journal was 6 percent per year. (a) Suppose that the inflation rate in the United States turns out to be 3 percent per year, on average, over the next 30 years. What will the real interest rate on these mortgage loans be in this case? (b) Suppose that, instead, US inflation turns out to be 5 percent per year, on average, over the next 30 years. What will the real interest rate on mortgage loans be in this case? (c) Who "wins," in the sense of being better off financially, if inflation turns out to be 5 percent instead of 3 percent: the households who take out new mortgage loans today at 6 percent, or the banks that make new mortgage loans today at 6 percent?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:9.
During the first week of May 2008, the nominal interest rate on 30-year fixed-rate
mortgage loans as reported by the Wall Street Journal was 6 percent per year.
(a) Suppose that the inflation rate in the United States turns out to be 3 percent per
year, on average, over the next 30 years. What will the real interest rate on these
mortgage loans be in this case?
(b) Suppose that, instead, US inflation turns out to be 5 percent per year, on average,
over the next 30 years. What will the real interest rate on mortgage loans be in
this case?
(c) Who "wins," in the sense of being better off financially, if inflation turns out to
be 5 percent instead of 3 percet: the households who take out new mortgage
loans today at 6 percent, or the banks that make new mortgage loans today at 6
percent?
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