Determine whether the following statements are TRUE or FALSE. Briefly explain your answer. Q1) “The rate...

Determine whether the following statements are TRUE or FALSE. Briefly explain your answer.

Q1) “The rate of returns of a bond is always the same as the yield to maturity of the bond.”

Q2) “The nominal interest rate is always higher than the real interest rate.”

Q3) “If the actual inflation rate is unexpectedly high, the realized real interest rate can be negative.”

Solutions

Expert Solution

Answer -

1.The given statement is false.

Explanation -

The rate of return of bond and the yield to maturity of bond, both are different concepts.The rate of return on bond refers to the interest rate necessary for investors to make investement in the bonds.A bond's yield to maturity is the measure of earning of a particular bond over its life.It is the internal rate of return.

2.The given statement is false.

Explanation -

A real interest rate is adjusted to remove the effects of inflation.The nominal interest rate isn't always higher than the real interest rate.When the rate of inflation is zero both real and nominal interest rates are equal.When there is increase in rate of inflation, the nominal interest rate is higher than the real interest rate.

3. The given statement is true.

Explanation -

If the actual inflation rate is unexpectedly high, the realised real interest rate can be negative.it is favourable situation for borrowers and lenders are in worst condition.An unexpected rise in inflation rate lowers the realised interest rate and some times it turns to be negative.

Rahul Sunny answered 1 year ago

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