25.Which of the following statements is TRUE? A) You would never earn a positive

Question

25.Which of the following statements is TRUE? A) You would never earn a positive rate of return by purchasing zero-coupon bonds at a discount and holding them to maturity. B) Borrowers want to protect their purchasing power reward from being wiped out by lower inflation. c) We can find the nominal interest rate by subtracting the real rate and inflation from the sum of the default and maturity premiums. d)If prices rise by 3% and your salary increases by 5%, you would experience a gain of purchasing power.

Explanation / Answer

A) You would never earn a positive rate of return by purchasing zero-coupon bonds at a discount and holding them to maturity. - False. Zero coupon bonds receive face value on maturity while the price paid for them is at a discount. So the gain on zero coupon bonds is the difference between the price and the face value. Hence there would be a positive rate of return by purchasing zero coupon bonds at a discount and holding them to maturity..

B) Borrowers want to protect their purchasing power reward from being wiped out by lower inflation. False. When the inflation is less than expected it is harmful to the borrowers as they have to pay more. Hence borrowers would want to protect their purchasing power frombeing wiped out by higher inflation.

C)  We can find the nominal interest rate by subtracting the real rate and inflation from the sum of the default and maturity premiums False. We can find the nominal interest rate by dividing the default and maturity premiums from the sum of the real rate and inflation.

D) If prices rise by 3% and your salary increases by 5%, you would experience a gain of purchasing power. True. There would be a gain of 2% in purchasing power.

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