The Following Premiums Apply to a 7-Month Bond: Interest Rate

question 91

Multiple Choice

The following premiums apply to a 7-month bond: interest rate risk premium = 0.35 percent; liquidity premium = 0.40 percent; default premium = 1.20 percent; inflation premium = 3.15 percent; real rate = 3.00 percent. What is the expected nominal interest rate on a 7-month risky security given these values?

• A) 5.85 percent
• B) 6.45 percent
• C) 7.55 percent
• D) 8.10 percent
• E) 9.30 percent

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Definitions:

Substitution Effect

Describes how consumers react to a change in the price of a good by substituting it with another good that is relatively cheaper.

Income Effect

The income effect refers to the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service.

Substitution Effect

The change in consumption patterns due to a change in relative prices, leading consumers to substitute one good for another more or less expensive.

Health Care Consumption

The use or utilization of health care services and products by individuals to maintain or improve their health status.