Dean Borrows $400 from Tim

question 244

Multiple Choice

Dean borrows $400 from Tim. Tim wants to make a 10% real return on his money, so they both agree on a 10% interest rate paid next year. Dean and Tim did not anticipate any inflation, yet the actual inflation turned out to be 4% next year. In this case,

• A) Tim is better off.
• B) Dean will pay $56 a year from now on.
• C) Dean is better off.
• D) Tim will receive more than 10% of real rate of return a year from now.

Calculate interest expenses and premium or discount amortization for bonds.

Understand the characteristics and financial implications of floating-rate debt.

Recognize the impact of changes in interest rates on the market value of floating-rate debt.

Distinguish between fair value hedge and cash flow hedge.

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Definitions:

Statistical Significance

A determination that the observed results in a study are unlikely to have occurred by chance, at a predetermined significance level.

Nature

Refers to the inherent qualities or characteristics of something, or the physical world collectively, including plants, animals, landscapes, and other features and products of the earth.

Nonlinear Relationship

A nonlinear relationship exists when changes in the independent variable do not lead to proportional changes in the dependent variable.

Predict

To make an educated guess about the future based on current data or trends.