Given That the Inflation Rate in 2006 Was About 3

question 94

Multiple Choice

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?

• A) The purchasing power of investors in these bonds grew over the course of the year.
• B) The real interest rate for investors in these bonds was greater than the rate of inflation.
• C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
• D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.

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Definitions:

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.

Initial Investment

Initial investment refers to the amount of money initially laid out for an investment project or venture.

Profitability Index

The present value of a project’s cash inflows divided by the investment required.

Discount Rate

The interest rate used in discounted cash flow analysis to determine the present value of future cash flows.