Yvonne Takes Out a Fixed-Interest-Rate Loan and Then Inflation Turns

question 83

Multiple Choice

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be.The real interest rate she pays is

• A)higher than she had expected,and the real value of the loan is higher than she had expected.
• B)higher than she had expected,and the real value of the loan is lower than she had expected.
• C)lower than she had expected,and the real value of the loan is higher than she had expected.
• D)lower then she had expected,and the real value of the loan is lower than she had expected.

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Definitions:

New Bonds

Recently issued debt securities by governments, municipalities, or corporations to finance their operations.

New Stock

Shares that are issued for the first time to the public by a company seeking to raise capital.

Indirect Method

A technique used in financial reporting to convert net income into net cash flow from operating activities, by adjusting for non-cash transactions.

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Financial professionals who assist corporations and governments in raising capital by underwriting and issuing securities and advising on mergers and acquisitions.