7. The real rate of interest is 3%; A) the expected inflation rate is 4% and the
ID: 2405318 • Letter: 7
Question
7. The real rate of interest is 3%; A) the expected inflation rate is 4% and the nominal risk-free rate is 3% B) the expected inflation rate is 3% and the nominal risk-free rate is 6% C) the expected inflation rate is 6% and the nominal risk-free rate is 3% D) the expected inflation rate is 2% and the nominal risk-free rate is 2% 8. Which of the following best describes the nominal risk-free interest rate? A) the sum of the inflation, maturity, default, and liquidity premium B) the inflation premium plus the real rate C) equal to the real rate of interest minus the sum of the inflation, maturity, defarul and liquidity premiums the real rate of interest minus the inflation premium D) 9. An example of a capital market security would be: A) commercial paper B) a bond C) a banker's acceptance D) a Treasury bill 10. Money market securities include: A) negotiable certificates of deposit B) commercial paper C) Treasury bills D) All of the above 11. The income statement: details the firm's assets and liabilities over a period of time. A) B) is a financial statement that summarizes a firm's revenues and expe particular point in time is a financial statement that shows the firm's financial position at a in time. is a financial statement that summarizes a firm's revenues and exy period of time. C) D)Explanation / Answer
7 Formula of Real interest rate is :
Real interest rate = Nominal rate - Inflation rate
3%(given)=Nominal risk free raterate - Inflation rate.
Hence we can get 3% real interest rate when Nominal risk free rate is 6% and inflation rate is 3%.
Therefore 3% = 6%(Nominal risk free rate)- 3% (Inflation rate )
Answer 7 :B : Expected inflation rate is 3% and Nominal risk free rate is 6%
8) Nominal interest rate is the rate without considering the effect of inflation. However Real interest rate takes into consideration the inflation effect>.
Therefore the fisher effect defines Nominal interest as sum of Inflation premium plus risk free rate.
after reaarranging the formula above we get
Real interest rate = Nominal rate - Inflation premium
Hence , Real interest rate + Inflation premium = Nominal interest
Answer 8: B : Inflation premium plus the real rate.
9 Capital markets are organised markets which bring together company's requiring capital for long term in form of (long term)debt and equity instruments and the investors who have the capital . Capital markets also provide a platform known as secondary market to the security holders to exchange these securities at market prices. Bonds and shares are the major examples of capital market.
Short term securities are traded over in money markets. Money market instruments are Treasury bills, commercial papers,Bankers acceptance . Money market instruments are traded over the counter.
Answer 9 : B : Bond
10 Money market exists to fulfill the needs of short term finance. Finacial instruments of money market generally have maturity period of less than one year with varying interest rates and credit risks.
Treasury bills, commercial papers,bankers acceptance, Certificate of deposit are all examples of Money market instruments.
Answer 10: D : All of the above
11 Income statement is a finacial statement that depicts the financial performance of a firm over a period of time. The finacial performance of firm can be analysed by summarising the revenue and expenses over a particular accounting time period say a year for instance.
Answer 11: D: is a finacial statement that summarises a firm's revenues and expenses over a period of time
(Please note the options of Q 11 were cut down, however i have answered to the best possible option visible )
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