Suppose You Have a Fixed-Rate Mortgage with a Nominal Interest

question 89

Multiple Choice

Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%.What is the expected real interest rate?

• A) 3%
• B) 4%
• C) 8%
• D) 12%

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Definitions:

Geometric Mean

The central tendency of a set of numbers that is calculated by taking the nth root (where n is the count of numbers) of the product of the values.

Weighted Mean

The mean obtained by assigning each observation a weight that reflects its importance.

Arithmetic Mean

The sum of a set of numerical values divided by the number of values, commonly referred to as the average.

Standard Deviations

A measure of the dispersion or spread of a set of numbers, showing how much variation exists from the average.