If a Lender Expects an Inflation Rate of 5% and Asks

question 145

Multiple Choice

If a lender expects an inflation rate of 5% and asks for a nominal interest rate of 10%,then the lender expects to earn a real interest rate of:

• A) 2%.
• B) 5%.
• C) 10%.
• D) 15%.

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Definitions:

Interest Payable

A liability account on a company's balance sheet representing the amount of interest expense that has been incurred but not yet paid as of the reporting date.

Adjusting Entry

A journal entry made at the end of an accounting period to allocate income and expenditures to the correct period.

Effective Interest Method

An accounting practice used to allocate bond premiums or discounts over the life of the bond.

Straight-Line Amortization

A method of allocating an intangible asset's cost evenly across its useful life, resulting in a consistent expense amount each period.