1. Which of the following would be most likely to result in a decrease in nomina
ID: 2806656 • Letter: 1
Question
1. Which of the following would be most likely to result in a decrease in nominal interest rates?
- A recession
- A recovery in the housing market coupled with a decrease in the unemployment rate.
- Lenders become more "risk averse."
-Lenders expect a sharp economic expansion in the near future.
2.
Which of the following would not be beneficial to real asset holders?
-An increase in stock and real estate prices, causing households to feel richer and spend more.
- A higher rate of inflation
-Rapid economic growth in countries around the world
-A bursting of the housing bubble.
3. In our nominal interest rate stack, the risk free rate is missing which of the following blocks?
- Cost of inflation
- Cost of operations
-Cost of default
-Cost of inventory
4. Refer to question 3. Which of the following blocks accounts for the fact that interest rates change over time?
- Cost of inflation
- Cost of operations
-Cost of default
-Cost of inventory
Explanation / Answer
1.
Nominal interest rate has two components, real risk free rate and inflation rate. real risk free rate remains constant,so decrease in nominal interest rate depends on decrease in inflation rate. if Lenders expect a sharp economic expansion in the near future, then inflation rate decrease and so nominal rate also decrease.
Option (D) is correct answer.
2.
In our nominal interest rate stack, the risk free rate is missing cost of default.COst of default is other part of interest rate.
Option (C) is correct answer.
3.
Cost of inflation chnage over time and so interest rate also change. A interest rate has different componenets, real risk free rate, cost of inflation, cost of default, cost of maturity, cost of liquidity.
Option (A) is correct answer.
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