Gladys Agrees to Lend Kay $1,000 for One Year at a Nominal

question 203

Multiple Choice

Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent.At the end of the year prices have actually risen by 7 percent.Gladys earned a real rate of return of

• A)Negative 2%.
• B)2%.
• C)5%.
• D)7%.

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Definitions:

Sinking Fund

A savings fund accumulated over time for the purpose of paying off debt or replacing a large expense in the future.

Yield to Maturity

The total return anticipated on a bond if the bond is held until its maturity date.

Coupon Rate

The interest rate stated on a bond or fixed-income security, representing the percentage of its face value paid to the holder annually.

Bond Prices

The market value of bonds, which can fluctuate based on changes in interest rates, credit quality of the issuer, and market demand.