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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Amortizing loans Suppose that you take out a 30-year mortgage loan of $200,000 at an interest rate of 10%. a. What is your total monthly payment? b. How much of the first month's payment goes to reduce the size of the loan? c. How much of the payment after two years goes to reduce the size of the loan?
Suppose you have a k5000 bank deposits. The interest rate is 6% compounded quarterly for 1 year. What is the effective annual interest rate (EAR)?
1. Consider a loan at 4.125% APR on 6 years for a $23,000 car a. Estimate the monthly payment (using the average balance method). b. How much would you pay in total for interest?
In a 5/1 hybrid adjustable-rate mortgage (ARM), the initial interest rate is fixed for 5 years, then is adjusted annually. (You usually pay points upfront at closing in exchange for the rate lock for the first 5 years.) Suppose that you buy a house with a $ 150000, 30-year mortgage with a 5/1 ARM with an initial rate of 5.5%; and suppose that five years later, the interest rate goes up to 7.5%. Use the Bankrate amortization schedule online to determine what your monthly payment was, originally, at 5.5%?Monthly Payment = What is your new payment? (Careful: the amount of the loan is no longer $ 150000, and you only have 25 years to pay it off.)New Monthly Payment =
A graduated payment mortgage (GPM) enables the borrower to have lower payments earlier in the mortgage and increased payments later on. The assumption is the borrower’s income will increase over time so that it will be easier for the borrower to meet all payments. Suppose you borrow $150,000 on a 30-year monthly mortgage. You obtain a GPM where monthly payments increase 6% per year through year 5 and then remain constant from year 5 through year 30. For annual interest rates of 2%, 3%, 4%, 5%, and 6%, use Solver to find the amount of each year’s monthly payment.
You borrow a GPM of $120,000 with annual payments and 30-year term. The interest rate is 10%. The payment rises by 2% each year. Questions: 1. What are the annual payments for years 1 to 30? 2. What is remaining balance at the end of each year? 3. What are the interest payment and principal payment for years 1 to 30?
You borrow a GPM of $120,000 with annual payments and 30-year term. The interest rate is 10%. The payment rises by 2% each year. please show how to solve using excel to answer a. b. and c. below a. What are the annual payments for years 1 to 30? b. What is remaining balance at the end of each year? c. What are the interest payment and principal payment for years 1 to 30?
A person borrows an amount for a new house and s/he is going to make monthly payments of 8,000 $ for the next 10 years. The nominal annual interest rate is quoted as 12%. (Assume the first instalment is going to be paid 1 month after s/he borrows.) a. Find the amount borrowed by this person. o. How much does this credit worth at the end of the last payment date? c.lf this person decides on closing his/her loan after paying the 34th instalment, how much should s/he pay? It is given that the closing fee of this credit is 1,453 $.
Suppose that you want to take out a loan and that your local bank wants to charge you an annual real interest rate equal to 3%. Assuming that the annualized expected rate of inflation over the life of the loan is 1%, determine the nominal interest rate that the bank will charge you. What was the actual real interest rate on the loan if, over the life of the loan, actual inflation is 0.5%?
You are looking at a one-year loan of $20,000. The interest rate is quoted as 10 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 10 percent interest. What rate would you actually be paying here? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. Interest rate 12:00 %
Suppose you borrow $29 thousand for 54 months to purchase a car. The loan has a rate of 7% with add-on interest payments. What are the total payments over the life of the loan, to the nearest $1? Drop the $ sign
You borrow $1,000 from a bank at 6% annual interest and promise to pay it back after a year. As you sign the loan documents, both you and the bank expect inflation to be 3% in the coming year. During the course of the year, however, the average price level rises by only 1%. What best describes this situation? Select one: a. Both you and the bank are better off because the inflation rate is less than the nominal interest rate but greater than zero. O b. The bank has gained at your expense because the real interest rate on the loan is higher than expected. c. Neither you nor the bank has gained anything extra because the inflation rate is less than the nominal interest rate. O d. You have gained at the bank's expense because you can pay the bank back in inflated dollars.

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