BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the real interest rate and expected inflation
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the risk-free rate and expected inflation
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the real interest rate and default premium
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the real interest rate and the T-bill rate
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Detailed explanation-1: -A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate and the inflation rate: Real interest rate = nominal interest rate-rate of inflation (expected or actual).
Detailed explanation-2: -The nominal interest rate is composed of the real interest rate plus a premium for inflation expectations. The nominal interest rate is not adjusted for true inflation, and is quoted on many financial products such as loans or savings accounts.
Detailed explanation-3: -But the nominal interest rate doesn’t take inflation into account. In other words, it is unadjusted for inflation.
Detailed explanation-4: -When expected inflation changes, the nominal interest rate will increase.