when the real rate of interest is less than the nominal rate of interest, then: course hero

What is the relationship between real interest rates and inflation rates?

Nov 19, 2018 · 20. When the real rate of interest is less than the nominal rate of interest, then: A) Disinflation must be occurring B) Investment returns cannot increase the purchasing power of an investment C) Nominal cash flows should be discounted with real rates D) The rate of inflation must be positive Correct Answer: d Points earned: 1 Points worth: 1 Feedback: pg. 272-275 21.

What is the difference between real and nominal interest rates?

When the real rate of interest is less than the nominal rate of interest, then: A. disinflation must be occurring. B. investment returns cannot increase the purchasing power of an investment. C. nominal cash flows should be discounted with real rates. D. the rate of inflation must be positive.

What is nominal nominal period and effective rate?

6) If the nominal interest rate is less than the real interest rate, we know that A) both the nominal or real interest rate must be negative. B) the nominal interest rate must be equal to expected inflation. C) expected deflation must be occurring D) expected inflation must be positive. E) expected inflation must be zero. .

What type of investment earns a real rate of return?

Period interest rate i = r/m Where m = number of compounding periods per year r = nominal interest rate = mi "An effective interest rate is the interest rate that when applied once per year to a principal sum will give the same amount of interest equal to a nominal rate of r percent per year compounded m times per year.Annual Percentage Yield (APY) is the standard term used by the …

What is flat interest rate?

A flat or add-on interest rate is applied to the initial investment principal each interest compounding period. This means total interest received for the investment on a flat interest is calculated linearly and simply is the summation of interest on all periods. For example, if you invest 1000 dollars at the present time in a project with flat interest rate of 12% per annum for 100 days, you will receive 32.88 dollars after 100 days:#N#1000 * 0.12 * ( 100 / 365) = 32.88 dollars interest#N#The flat interest rate is usually applied when interest is calculated for a portion of a year or period.

How often is interest compounded?

In that case, the interest rate would be compounded more than once a year. For example, if the financial agency reports quarterly compounding interest, it means interest will be compounded four times per year and you would receive the interest at the end of each quarter.

What is nominal interest rate?

The nominal interest rate (or money interest rate) is the percentage increase in money you pay the lender for the use of the money you borrowed. For instance, imagine that you borrowed $100 from your bank one year ago at 8% interest on your loan. When you repay the loan, you must repay the $100 you borrowed plus $8 in interest—a total of $108.

What does 5% inflation mean?

Inflation is a rise in the general price level. A 5% inflation rate means that an average basket of goods you purchased this year is 5% more expensive when compared to last year. This leads to the concept of the real, or inflation-adjusted, interest rate. The real interest rate measures the percentage increase in purchasing power ...

Do TIPS bonds have inflation?

The TIPS securities earn a fixed rate of interest just like many other types of government bonds. But, in addition to the fixed rate, the principal value of your TIPS bond is adjusted for inflation. So, at maturity, TIPS investors receive an inflation-adjusted principal amount.