Suppose That Lenders Want to Receive a Real Rate of Interest

question 158

Multiple Choice

Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a
Nominal interest rate of

• A) 2 percent.
• B) 3 percent.
• C) 5 percent.
• D) 7 percent.

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Definitions:

Lend Out

The act of providing funds to another party with the expectation of being repaid, usually with interest.

Debt Issue

The process by which a government, corporation, or other entity raises money through the sale of bonds, notes, or other forms of debt.

Leverage

The practice of leveraging borrowed money to enhance the expected returns on an investment.