With Respect to the Interest Rate, the Inflationary Premium

question 254

Multiple Choice

With respect to the interest rate, the inflationary premium

• A) is added to the nominal rate of interest to obtain the real rate of interest.
• B) is the interest rate expressed in today's dollars.
• C) covers anticipated depreciation in purchasing power.
• D) is derived from the COLA.

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Definitions:

Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Real Withdrawals

The process of taking out funds from an investment or savings account, adjusted for the effects of inflation, to maintain the purchasing power of the money.

Annual Interest Rate

The percentage increase in the value of money due to interest, calculated on a yearly basis.

Amortize

The method of distributing a loan into a sequence of set payments across a duration, encompassing both the principal amount and interest.