Assuming the chances of being paid back are the same, would a nominal interest r

Question

Assuming the chances of being paid back are the same, would a nominal interest rate of 10 percent always be more attractive to a lender than a nominal rate of 5 percent? Yes. because the tender is paid the interest rate, the higher rate is always more attractive. Not always. Lenders are concerned with the real return they receive. If the higher nominal interest rate represents a higher real interest rate, then the tender Will find it more attractive. If. however, it merely refleas higher expected inflation and the real return is tower, this is not to the benefit of the tender. Not alv/ays. It depends on what month of the year it is. Yes. because a 10 percent nominal interest rate versus a 5 percent nominal interest rate means the tender is receiving greater compensation for inflation.

Explanation / Answer

Assuming the chances of being paid back are the same, a nominal interest rate of 10% would not always be more attractive to a lender than a nominal rate of 5%,because lenders are concerned with the real return they receive.If the higher nominal interest rate represents a higher real interest rate, then the lender will find it more attractive.If, on theother hand, the higher nominal interest rate merely reflects higher expected inflation, this maynot be to the benefit of the lender.

Suppose a nominal interest rate of 10% reflecting expected inflation of 7% and a real interest rate of 3% then it would not be preferred by lenders over a nominal interest rate of 5% reflecting expected inflation of 1% and a real interest rate of 4%.It is the real not the nominal interest rate that matters.

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