Question

You borrowed $1,500 for one year, and agreed to pay back $1,680. At the outset you expected the inflation rate to be 2% over the period of the loan, but it ended at 4%. In this case,

Question options:

A.	the nominal interest rate was 12%, the expected real interest rate was 14%, the actual real interest rate was 16%.
B.	the nominal interest rate was 12%, the expected real interest rate was 10%, the actual real interest rate was 6%
C.	the nominal interest rate was 12%, the expected real interest rate was 10% the actual real interest rate was 8%.
Question 6		0 / 1 point

A financial security pays $200 in 2 years. You are guaranteed to get paid, so there is no risk involved. You know that you can place your money in the bank and receive 4% interest. How much are you willing to pay for the $200 financial security?

Question options:

A.	$184.91
B.	$192.31
C.	$200
Question 7		0 / 1 point

Assume that the nominal interest rate is 3% while we have 5% deflation. In this situation, the real interest rate is:

Question options:

A.	-5%
B.	3%
C.	8%
Question 9		0 / 1 point

You buy a security that will pay you $500 in 1 year. You pay $455 today. In this case, your yield to maturity is ____ while your rate of return is ______.

Question options:

A.	9%, 9%
B.	9%, 9.89%
C.	9.89%, 9.89%
Question 10		0 / 1 point

You win a lottery ticket that will pay you $3,000. However, you won't receive everything today, but $1,000 per year, starting today. You want to sell the lottery ticket today. How much can you sell it at if market interest rates are 5%?

Question options:

A.	$2,721.09
B.	$2,859.41
C.	$3,000
D.	$2,723.25

Answer 1

1.

Loan = 1500

Amount to be repaid = 1680

F = P *(1+i)

1680 = 1500 * (1+i)

(1+i) = 1680 / 1500 = 1.12

i = 0.12 = 12%

expected Real interest rate = 12% - 2% = 10%

the actual real interest rate = 12% - 4% = 8%.

Third option is correct

6

P = 200 / (1+0.04)^2 = 184.91

First option is correct

7

Real int rate = nominal int rate - inflation

= 3% - (-5%)

= 8%

Third option is correct

9

500 = 455 (1+i)

1+i = 500 / 455 = 1.0989

i = 0.0989 = 9.89%

Yeild to maturity = ROR = 9.89%

10

Present value = 1000 +1000*(P/A, 5%,2)

= 1000 + 1000*1.85941

= 2859.41

Second option is correct