Which of the following statements is TRUE? A) You would never earn a positive ra

Question

Which of the following statements is TRUE?

A) You would never earn a positive rate of return by purchasing zero-coupon bonds at a discount and holding them to maturity.

B) Borrowers want to protect their purchasing power reward from being wiped out by lower inflation.

c) We can find the nominal interest rate by subtracting the real rate and inflation from the sum of the default and maturity premiums.

d)If prices rise by 3% and your salary increases by 5%, you would experience a gain of purchasing power.

Explanation / Answer

A) You would never earn a positive rate of return by purchasing zero-coupon bonds at a discount and holding them to maturity.(False) because discounted zero coupon bonds always give positive returns else treasury bills won't sell

B) Borrowers want to protect their purchasing power reward from being wiped out by lower inflation.(False)
Higher inflations causes lower purchasing power and lower inflation causes higher purchasing power. Borrowers don't want to protect their purchasing power from lower inflation.

c) We can find the nominal interest rate by subtracting the real rate and inflation from the sum of the default and maturity premiums.(False) Nominal rate includes real rate and inflation.

d)If prices rise by 3% and your salary increases by 5%, you would experience a gain of purchasing power.(True)
Because if salary hike rate is higher than inflation then purchasing power increases.

Best of Luck. God Bless

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