Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interestrate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (rº =4%).Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (A )turns out to be 6%.Expected inflation a year ago was 4%.Actual inflation (1) is(greater than/lower than) expected inflation ( n°, .The ex-ante real interest rates is_%.The ex-post real interest rates is%.Conclusion from scenario I:When actual inflation is greater than expected inflation, ex-ante real interest rate is_(greaterthan/lower than) the ex-post real interest rate, which means that borrowers are made(worseoff/better off) and lenders are made(worse off/better off).Nominal interest rates should(rise/fall) according to the Fisher effect.

The rate at which prices rise over time, resulting in a decrease in money's purchasing power is…

Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interest rate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (Te =4%). Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (1 )turns out to be 6%. Expected inflation a year ago was 4%. Actual inflation (T) is (greater than/lower than) expected inflation ( 7e,. The ex-ante real interest rates is %. The ex-post real interest rates is_ %. Conclusion from scenario I: When actual inflation is greater than expected inflation, ex-ante real interest rate is (greater than/lower than) the ex-post real interest rate, which means that borrowers are made _(worse off/better off) and lenders are made (worse off/better off). Nominal interest rates should (rise/fall) according to the Fisher effect.

Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interest rate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (Te =4%). Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (1 )turns out to be 6%. Expected inflation a year ago was 4%. Actual inflation (T) is (greater than/lower than) expected inflation ( 7e,. The ex-ante real interest rates is %. The ex-post real interest rates is_ %. Conclusion from scenario I: When actual inflation is greater than expected inflation, ex-ante real interest rate is (greater than/lower than) the ex-post real interest rate, which means that borrowers are made _(worse off/better off) and lenders are made (worse off/better off). Nominal interest rates should (rise/fall) according to the Fisher effect.

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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You have borrowed $60,000 from a bank at an interest rate of 12% per year, compounded monthly. You are to repay the loan and its interest charges in equal monthly payments over a 20-year period. The estimated annual inflation rate is 5%, compounded monthly. a) What is the amount of your monthly payments? b) What is the bank's real rate of return on this deal?
If a lender makes a simple loan of $500 for 5 years and charges 3%, then the amount that the lender receive at maturity is $ (Round your response to the nearest two decimal place) If a lender makes a simple loan of $2000 for one year and charges $90 interest, then the simple interest rate on that loan is %. (Round your response to the nearest whole number) If a borrower must repay $106.50 one year from today in order to receive a simple loan of $100 today, the simple interest on this loan is OA. 6.0% OB. 6.5% OC. 65% OD. 5.0%
2a) Consider a 4-year loan of $5,000 which you will pay back in 4 equal annual payments. If the loan has an 8% annual interest rate over the 4-year period, what would the size of each payment be? 2b) Of the payment you calculated for the first part of this question, how much of that payment would be the interest for the second payment and how much of that payment would be principal repayment for the loan?
A bank makes a loan with the following characteristics: monthly payments for 10 years, with an APR of 6%. The amount loaned is $200,000. What is the duration of the loan? What is the expected change in loan value if the interest rate decreases by 1 percentage point immediately after approving the loan. Choose the closest answer below. 5.32 years; -$10,037 3.21 years; $6,056 4.55 years; -$8,577 6.74 years; $12,716
Suppose you take out a margin loan for $71,000. The rate you pay is an effective rate of 5.6 percent. If you repay the loan in six months, how much interest will you pay? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Find the interest rates earned on each of the following. Round your answers to the nearest whole number. a. You borrow $700 and promise to pay back $777 at the end of 1 year. % b. You lend $700 and the borrower promises to pay you $777 at the end of 1 year. % c. You borrow $88,000 and promise to pay back $550,376 at the end of 15 years. % d. You borrow $20,000 and promise to make payments of $6,687.60 at the end of each year for 5 years. %
basic ARM is made for $220,000 at an initial interest rate of 6 percent for 30 years with an annual resetdate. The borrower believes that the interest rate at the beginning of year (BOY) 2 will increase to 7 percent. Required:a. Assuming that a fully amortizing loan is made, what will the monthly payments be during year 1? b. Based on (a) what will the loan balance be at the end of year (EOY) 1? c. Given that the interest rate is expected to be 7 percent at the beginning of year 2, what will the monthlypayments be during year 2? d. What will be the loan balance at the EOY 2 ? e. What would be the monthly payments in year 1 if they are to be interest only?
You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return? O 0.85%O 1.25% -2.1% O -0.85%
You have been assigned to estimate the interest rates that your company may have to pay when borrowing money in the near future. The following information is available.kPR = 2%MR = 0.1% for a 1 year loan increasing by 0.1% for each additional yearLR = 0.05% for a 1 year loan increasing by 0.05% for each additional yearDR = 0 for a 1 year loan, 0.2% for a 2-year loan, increasing 0.1% for each additional yearExpected Inflation Rates Year 1 = 7% Year 2 = 5% Year 3 and thereafter = 3% a. Calculate the inflation adjustment (INFL) for a 5-year loan. b. Calculate the appropriate interest rate for a 5-year loan.
Suppose the interest rate is 3.9%. a. Having $350 today is equivalent to having what amount in one year? b. Having $350 in one year is equivalent to having what amount today? c. Which would you prefer, $350 today or $350 in one year? Does your answer depend on when you need the money? Why or why not? a. Having $350 today is equivalent to having what amount in one year? It is equivalent to $. (Round to the nearest cent.)
Consider two loans with a 1-year maturity and identical face values: a(n) 8.3% loan with a 0.99% loan origination fee and a(n) 8.3% loan with a 4.9% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why? The EAR in the first case is %. (Round to one decimal place.)
1. Suppose you borrow $16,000. The interest rate is 9%, and it requires 4 equal end-of-year payments. Set up an amortization schedule that shows the annual payments, interest payments, principal repayments, and beginning and ending loan balances. Round your answers to the nearest cent. If your answer is zero, enter "0".

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