If the Federal Treasury bonds are currently paying 9 percent and the inflation rate is 3.2 percent, A) What is the real interest rate? Use the approximate relationship between the nominal interest rate and inflation. B) What is the exact real rate? Use the Fisher equation.
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- Given the anticipated rate of inflation (i) of 2.13% and the real rate of interest (R) of 3.1%, find the nominal rate of interest (r). Mathematical procedure needed(Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 3.6 percent and the expected inflation rate is 6.8 percent?Suppose the real rate is 3.1 percent and the inflation rate is 4.7 percent. What rate would you expect to see on a Treasury bill?
- The Fisher equation tells us that the real interest rate approximately equals the nominal rate minus the inflation rate. Suppose the inflation rate increases from 3% to 5%. Does the Fisher equation imply that this increase will result in a fall in the real rate of interest? Explain.Suppose we observe the following rates: 1R1 = 6.7, 1R2 = 7.4, and E(2r1) = 6.7. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2? Please step by step.Identify the correct mathematical expression for the relationship between nominal interest rates and real interest rates. (R denotes the nominal rate of return, r denotes the real rate of return, and h denotes the inflation rate.) Multiple choice question. R = r + h (1 + R) = (1 + r) × (1 + h) (1 + h) = (1 + R) × (1 + r) (1 + r) = (1 + R) × (1 + h)
- 1. What is the most accurate measure of interest rates? a) Current Yield b) Nominal Interest Rate c) Simple Interest Rate d) Yield to MaturitySome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Symbol Component This is the rate for a short-term riskless security when inflation Maturity risk premium Inflation premium Liquidity risk premium is expected to be zero. It is calculated by adding the inflation premium to r* This is the difference between the interest rate on a U.S. Real risk-free rate Treasury bond and a corporate bond of the same profile-that Nominal risk-free rate is, the same maturity and marketability. Default risk premium This is the premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security's entire life. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This is the premium added to the equilibrium interest…The expected real interest rate approximately equals Select one: OA. the yield to maturity on a coupon bond held to maturity. OB. the nominal interest rate plus the expected rate of inflation. O C. the nominal interest rate minus the tax rate. O D. the nominal interest rate minus the expected rate of inflation.
- What would you expect the nominal rate of interest to be if the real rate is 4.2% and the expected inflation rate is 7.2%?Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is calculated by adding the inflation premium to r*. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This premium is added when a security lacks marketability,…Suppose we observe the following rates: 1R1= 0.75%, 1R2=1.20%, E(2r1)=0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?