If You Are Promised a Nominal Return of 12% on a One

question 83

Multiple Choice

If you are promised a nominal return of 12% on a one year investment,and you expect the rate of inflation to be 3%,what real rate do you expect to earn?

• A) 5.48%
• B) 8.74%
• C) 9.00%
• D) 12.00%

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Definitions:

Down-Sloping

Describes a trend or line on a graph that moves from a higher to a lower point, indicative of a decrease over time.

Future Inflation

The projected increase in the price level of goods and services over time, affecting the purchasing power of money.

Term Structure

Describes the relationship between interest rates or yields and the maturity of debt securities, typically depicted in a yield curve showing rates for various terms.

Bond Ratings

A grade given to bonds that indicates their credit quality, with higher ratings suggesting a lower risk of default.