If the Nominal Interest Rate Is 8 Percent and the Rate

question 170

Multiple Choice

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, what is the real interest rate?

• A) -11 percent
• B) -5 percent
• C) 5 percent
• D) 11 percent

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Definitions:

Amortize

This refers to the process of gradually writing off the initial cost of an asset over a period.

Discount

A reduction applied to the regular price of goods or services, or the amount by which the market value of a bond falls below its par value.

Premium

The amount by which the price of something exceeds its principal or nominal value, often applied to bonds, insurance policies, and preferred stock.

Forward Contract

A personalized agreement between two entities to purchase or sell a specific asset at a predetermined price on a later date.