Suppose You Have a Fixed-Rate Mortgage with a Nominal Interest

question 89

Multiple Choice

Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%.What is the expected real interest rate?

• A) 3%
• B) 4%
• C) 8%
• D) 12%

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Definitions:

Diversification

Reducing risk by investing in several different things, so that the possible losses are independent events.

Pooling

A strong form of diversification in which an investor takes a small share of the risk in many independent events, so the payoff has very little total overall risk.

Risk Reduction

Strategies or actions implemented to minimize the probability or impact of negative events or losses.

Market for Risk

A financial market where individuals and institutions trade financial instruments to manage risk exposure.