When the Real Interest Rate Is Less Than Zero, Then

question 54

Multiple Choice

When the real interest rate is less than zero, then a

• A) creditor will gain purchasing power.
• B) creditor will just break even on his or her real loan return.
• C) creditor will lose purchasing power.
• D) creditor will benefit from inflation.
• E) creditor's purchasing power will not be affected because the nominal interest rate is greater than zero.

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Definitions:

Short-Term Bond

A bond that matures in a short period, usually less than five years, making it less sensitive to interest rate changes compared to long-term bonds.

Default Risk Premium

The additional return that investors require to compensate them for the risk of default by the borrower.

Par Value

The face value of a bond or stock, representing the amount that the issuer agrees to pay at maturity or the base value of a stock set by the issuing company.

Coupon Rate

The interest rate stated on a bond or other fixed-income security, representing the periodic payment to bondholders, usually expressed as a percentage of the principal.