Question
In: Economics
Define and describe nominal and real interest rates. What impact do interest rates have on the...
Define and describe nominal and real interest rates. What impact do
interest rates have on the cost of financing a purchase? What is
the discount formula.
Solutions
Expert Solution
Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to advertised or stated interest rate on loan, without taking into account any fees or compounding of interest.
Real interest rate is one that is adjusted to remove the effect of inflation, reflecting the real cost of funds to the borrower and the real yield to the lender or investor.
Changes in interest rates have impact on the cost of financing a purchase as a decrease in interest rates lowers the cost of borrowing, which encourages business to increase investment spending.
We can calculate discount rate using the formula 1(1+i)^n where i represent the interest rates and n equals the number of year until we receive the cash flow. Discount rate represents the compensation that the investors require to assume the risk of investing in that asset in hope of receiving the future cash flows generate from it.
Rahul Sunny answered 1 year agoRelated Solutions
Define and describe nominal and real interest rates. What impact do interest rates have on the...
Define and describe nominal and real interest rates. What
impact do interest rates have on the cost of financing a purchase?
What is the discount formula?
Question 3 (20 Marks) A) Please define real versus nominal interest rates. Do we using see...
Question 3
A) Please define real versus nominal interest rates. Do we using
see figures in the press stated in nominal or real terms? When
expected inflation is positive, is nominal inflation greater than
or less than real? What if expected inflation is negative, what
happens to the relationship?
B) The relationship between nominal and real interest rates
continues to hold when there is deflation rather than inflation,
except the overall change in prices is now negative. For example,
take...
Define the nominal interest rate. How is the nominal interest related to the real interest rate?...
Define the nominal interest rate. How is the nominal interest
related to the real interest rate? Why can we think of 1+ rt ,
where rt is the real interest rate, as the relative price of
consumption today in terms of consumption in the future?
When we observe interest rates in the financial press, do we see nominal or real rates?...
When we observe interest rates in the financial press, do we see
nominal or real rates? Suppose you are in the process of applying
for a 30-year fixed-rate mortgage. Which rate is more relevant to
you? Why?
Now suppose you are planning to invest in a 30-year Treasury
STRIPS. Which rate is more relevant to you? Why?
Why are global interest rates so low? Also describe the difference between real and nominal interest...
Why are global interest rates so low? Also describe the
difference between real and nominal interest rates.
Briefly describe the difference between real world and
risk-neutral pricing.
What impact do Interest Rates have on making Financial Business Decisions?
What impact do Interest Rates have on making Financial Business
Decisions?
Explain the difference between nominal and real interest rates. Assume current interest rates and that you...
Explain the difference between nominal and real interest rates.
Assume current interest rates and that you have a loan for a
vehicle. You will have to look up current interest rates and the
inflation rate. What is your nominal and your real interest rate?
Calculate. Explain what might happen if the Federal Reserve
increases interest rates by .25 points. What is the impact on your
rate(s)?
Type your answer
Calculate the missing values: (5pts) Nominal and real interest rates. Provide your calculations. Real Interest Rate...
Calculate the missing values:
(5pts) Nominal and real interest rates. Provide your
calculations.
Real Interest Rate
Nominal Interest Rate
Inflation
2
6
15
10
8
13
(10 pts) Per capita GDP: Using the following data, organize
from the largest to smallest, according the rate of growth of GDP
per capita in each year. Explain your answer. (5pts)
Year
Australia
Belgium
Brazil
Colombia
France
Japan
United States
GDP growth (annual %)
2013
2.44
0.02
2.74
4.94
0.66
1.61
2.22
2014
2.50...
(a) Define real interest rate. How is it related to nominal interest rate? (b) Suppose the...
(a) Define real interest rate. How is it related to nominal
interest rate?
(b) Suppose the expected annual inflation rate in the U.S. is
1.5% and current nominal interest rate is 2%, what is the
approximate real interest rate? What is the actual real interest
rate?
Explain how the increase in the supply of money affects the real and nominal interest rates.
Explain how the increase in the supply of money affects the real
and nominal interest rates.
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