Suppose That Over the Past Year,the Real Interest Rate Was

question 117

Multiple Choice

Suppose that over the past year,the real interest rate was 5 percent and the inflation rate was 3 percent.It follows that

• A)the dollar value of savings increased at 5 percent,and the purchasing power of savings increased at 2 percent.
• B)the dollar value of savings increased at 5 percent,and the purchasing power of savings increased at 8 percent.
• C)the dollar value of savings increased at 8 percent,and the purchasing power of savings increased at 2 percent.
• D)the dollar value of savings increased at 8 percent,and the purchasing power of savings increased at 5 percent.

---

Definitions:

Crossover Rate

The point at which two different investment projects have the same net present value (NPV) or rate of return, often used in capital budgeting to compare the desirability of projects.

Net Present Value

A calculation that compares the value of a dollar today to the value of that same dollar in the future, considering inflation and returns, used to evaluate investments.

IRR

Internal Rate of Return; a financial metric used to gauge the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Cost of Capital

The rate of return a company must earn on its investment projects to maintain its market value and attract funds.