If the Nominal Interest Rate Is 5 Percent and the Real

question 266

Multiple Choice

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is

• A) 8 percent.
• B) 5 percent.
• C) 3 percent.
• D) 2 percent.

---

Definitions:

Effective-Interest Method

A method of calculating the amortized cost of a bond and of interest expense over the bond's life, reflecting a constant rate of interest.

Amortization

The process of gradually writing off the initial cost of an intangible asset over a period.

Market Rate

The interest rate available in the marketplace for similar transactions.