If the Current Inflation Rate Is 5%,then the Nominal Rate

question 56

Multiple Choice

If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:

• A)13.0%.
• B)13.4%.
• C)4.9%.
• D)3.0%.

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Definitions:

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.

Simple Interest

Interest calculated on the principal portion of a loan or deposit, without compounding on the interest previously earned.

Original Principal

The initial amount of money borrowed or invested, before the addition of interest or profits.

Compounded Annually

A method of calculating interest where the interest rate is applied once per year to the principal, including any interest from previous periods.