Question

A classic example of a discount loan is

If the US Treasury Yield Curve is upward sloping then it is indicating a

	A. downturn in the economy
	B. upturn in the economy
	C. no change to the economy (i.e. the economy is in transition phase)
	D. The US Treasury Yield Curve yield does not signal the direction of the economy.
	E. The US Treasury Yield Curve maps out corporate borrowing levels

Using the Fischer Equation what is the nominal rate of interest if the real rate is 1.6% and expected inflation is 2.3%?

Answer 1

A Classic example of a discount loan is Bill Discount. So when you have issued a bill to someone and the product/service is given on credit then you can sell the bill ( right to collect the proceeds) at a discount. The Bank will then get the full amount from the customer while the bill issuer basically gets a loan at discount.

If a Yield curve is upward sloping then it means that the return for investing in long term is paying higher thus there are prospects of better growth in the economy. So the correct answer is B Upturn in the economy.

As we know that Fischer Equation is (1+i) = (1+r) * (1+Inf)

i = Nominal Interest Rate

r = real rate of interest = 1.6%

Inf = Inflation = 2.3%

Also approximation is given by i = r + inf

We will take both the equation,

(1+i) = (1+0.016) * (1+ 0.023)

(1+i) = (1.016) * (1.023)

(1+i) = 1.039368

i = 1.039368 - 1

i = 0.039368

i = 3.9368%

While approximation formula will give 0.016 + 0.023 = 0.039 = 3.9%

But we will exact one 3.9368%