Suppose that you want to take out a loan and that your local bank wants to charge you an annual real interest rate equal to 3%. Assuming that the annualized expected rate of inflation over the life of the bond is 1%, determine the nominal interest rate that the bank will charge you. Part 2 The bank will charge you a nominal interest rate of enter your response here
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If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will be 2%, what nominal rate of interest will you charge?
Akash M.
Suppose that you buy a two-year 8% bond at its face value. a-1) What will be your nominal return over the two years if inflation is 3% in the first year and 5% in the second? a-2) What will be your real return? b) Now suppose that the bond is a TIPS. What will be your real and nominal return?
The interest rate stated by a financial institution is sometimes called the nominal rate. If interest is compounded, the actual rate is, in general, higher than the nominal rate, and is called the effective rate. If $r$ is the nominal rate and $n$ is the number of times interest is compounded annually, then $$R=\left(1+\frac{r}{n}\right)^{n}-1$$ is the effective rate. Here, $R$ represents the annual rate that the investment would earn if simple interest were paid. Find the effective rate to the nearest hundredth of a percent if the nominal rate is $3 \%$ and interest is compounded quarterly.
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