Market Interest Rates Have Risen Substantially in the Five Years

question 96

Multiple Choice

Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7 percent return.If the investor sells now she is likely to receive:

• A)Greater than a 7 percent total return
• B)Less than a 7 percent total return
• C)A 7 percent total rate of return
• D)A 7 percent nominal return but less than a 7 percent real return

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Definitions:

Capital Budgeting

The process by which a business evaluates and plans for significant investments in projects, properties, or equipment.

Expected Cash Flows

Forecasts of the amounts, timing, and uncertainty of cash receipts and disbursements that a business anticipates.

Annual Rate of Return Technique

A method to estimate the profitability of potential investments by calculating the projected annual rate of return.

Time Value of Money

The concept that money available now is worth more than the same amount in the future due to its potential earning capacity.