USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Assume that during the pas
ID: 2812466 • Letter: U
Question
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Assume that during the past year the consumer price index increased by 1.5 percent and the securities listed below returned the following nominal rates of return. U.S. Government T-bills U.S. Long-term bonds 6. Refer to the information in the table above. What are the real 275% 4 5% rates of return for each of these securities? b. d. 4.29% and 6.32% 1.23% and 4.29% 3.20% and 6.32% 1.23% and 3.20% 3.75% and 5.75% 7. Refer to the information in the table above. If next year the real rates all rise by 10 percent while inflation climbs from 1.5 percent to 2.5 percent, what will be the nominal rate of return on each security? 1.24% and 1.52% 1.35% and 3.52% 3.89% and 6.11% 3.52% and 3.89% 1.17% and 6.11% 8. The rate of exchange between future consumption and b. d. current consumption is a. The nominal risk free rate. b. The coefficient of investment exchange. c. The pure rate of interest. d. The consumption/investment paradigm e. The expected rate of return.Explanation / Answer
Real rate=(1+nominal rate)/(1+inflation)-1
Nominal rate=(1+real rate)*(1+inflation)-1
1.
Option d
TBIlls real return=1.0275/1.015-1=1.23%
Long term bonds real return=1.0475/1.015-1=3.20%
2.
Option c
TBills nominal return=(1+1.23%*(1+10%))*(1+2.5%)-1=3.89%
Long term bonds nominal return=(1+3.20%*(1+10%))*(1+2.5%)-1=6.11%
3.
Option c
THe pure rate of interest
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