The Nominal Interest Rate Is 7% and the Expected Inflation

question 160

Multiple Choice

The nominal interest rate is 7% and the expected inflation rate is 2%.Based on the Fisher effect,the real rate of interest is

• A) 5.0%.
• B) 6.86%.
• C) 5.1%.
• D) 4.9%.

---

Definitions:

Yield To Maturity

Yield to maturity represents the total return an investor would receive by holding a bond until it matures, including all interest payments and the repayment of principal.

Realized Compound Yield

The reflective measurement of the total returns on an investment, factoring in compounding interest or returns over a specified time frame.

Coupon Rate

The yearly rate of interest that the entity issuing a bond pays to the bondholders, represented as a percentage of the bond's principal value.

Yield To Maturity

The expected rate of return on a bond if held until its maturity date, reflecting both interest payments and any gain or loss if the bond was purchased at a discount or premium.