Suppose That the Current Market Interest Rate Is 12% for Non-Fraudulent

question 42

Multiple Choice

Suppose that the current market interest rate is 12% for non-fraudulent bonds, and that one in six bonds are fraudulent in a given market.What would the interest rate be if a fraud premium is introduced, assuming (1) a one-year investment horizon and (2) the market does not require a risk premium?

• A)68.0%
• B)40.0%
• C)34.4%
• D)10.0%

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Definitions:

Effective Usury Laws

Regulations that set maximum interest rates on loans to protect consumers from excessively high costs.

Loanable Funds

The money available for borrowing in the financial markets, often coming from savings and influenced by interest rates.

Real Rate of Interest

The interest rate adjusted for inflation, reflecting the true cost of borrowing money and the real yield for savers.

Nominal Rate of Interest

The stated interest rate of a bond or loan without adjusting for inflation, representing the actual percentage that borrowers pay to lenders.