There are a few episodes of negative nominal interest rates around the world. So
ID: 1166248 • Letter: T
Question
There are a few episodes of negative nominal interest rates around the world. Some may or may not be in play as you read this book. The Swiss nominal policy rate, the Swiss equivalent of the federal funds rate, was negative in 2014 and 2015 If so, why not hold cash instead of bonds? Foreign investors, particularly those from struggling emerging market economies, may be willing to "pay for safety." A. O B. Even with negative yields, bonds allow investors to achieve some degree of portfolio diversification. O c. Bonds with negative yields will stll be profitable to hold if bond yields are expected to decrease even further. O D. All of the above are plausible. O E. None of the above. The real rate of interest is frequently negative . A negative value for the real interest rate arises when the nominal rate of interest O A. is equal to the inverse of the rate of price inflation. O B. is equal to zero. ° C. is exceeded by the rate of price inflation. O D. exceeds the rate of price inflation. A negative real interest rate will, all else constant, borrowing and lending.Explanation / Answer
1. All of the above are plausible i.e. A, B and C is right that we should not hold cash instead of bonds. So correct option is D.
2. A negative value for the real interest rate arises when the nominal rate of interest is exceeded by the rate of price inflation. So correct option is C.
A negative real interest rate will, all else constant increases borrowing and decrease lending.
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