Q:
A:
At
yearend 2004, the Federal Reserve reported moderate
economic growth of 3%, a reduction
of the unemployment rate to 3% and an inflation rate
that was "well contained at 3%". Under
these circumstances, the real interest rate of the
10% corporate bond you own is 7% this year. Which
of the following economic factors would factor in
to the real interest rate of your bond?
a) Unemployment at 3%
b) The Fed Funds rate
c) Inflation at 3%
d) Economic growth at 3%
a) Unemployment at 3%
b) The Fed Funds rate
c) Inflation at 3%
d) Economic growth at 3%
The correct answer is c).
The real interest rate, also referred to as the inflationadjusted return, factors the eroding effect of inflation from an investment's return.
The formula is: Yield plus or minus inflation rate = real interest rate/inflationadjusted return.
The Fed Funds rate is the market rate that banks charge each other on overnight loans of reserves.
The real interest rate, also referred to as the inflationadjusted return, factors the eroding effect of inflation from an investment's return.
The formula is: Yield plus or minus inflation rate = real interest rate/inflationadjusted return.
The Fed Funds rate is the market rate that banks charge each other on overnight loans of reserves.
MORE FAQS

Can real interest rates be negative?

How does the Fisher effect illustrate returns on bonds?

How do I calculate yield of an inflation adjusted bond?

What is the rationale behind the effective interest rate?

Is the prime rate in the US different from the federal funds rate?

What are the most important interest rates?

How is the Macaulay duration related to fixed income markets?

Is there a difference between financial ratio analysis and accounting ratio analysis?

When was the last time the Federal Reserve hiked interest rates?

What is the rate of return I can expect on a savings account?

Why are P/E ratios generally higher during times of low inflation?

What are the implications of a high Federal Funds Rate?

Which of the following would endure the most negative impact based on rising inflation ...

Are dividends the best way to make money for retirement?

How many attempts at each CFA exam is a candidate permitted?

What's the average salary of a financial advisor?

Why is Hong Kong considered a tax haven?

Is smart beta cheaper than hedge funds?
RELATED FAQS

Can real interest rates be negative?
Discover the circumstances that can cause real interest rates to be negative and learn how to calculate the values of real ... 
How does the Fisher effect illustrate returns on bonds?
Learn how the Fisher effect shows the impact of expected future increases in inflation on the prices of bonds and their interest ... 
How do I calculate yield of an inflation adjusted bond?
Learn how to calculate the real yield of an inflationadjusted bond, such as the U.S. Treasury inflationprotected security ... 
What is the rationale behind the effective interest rate?
Read about the reasons why market actors identify the effective interest rate as it pertains to investing, lending and accounting.
RELATED TERMS

InflationAdjusted Return
A measure of return that accounts for the return period's inflation ... 
Real Economic Growth Rate
A measure of economic growth from one period to another expressed ... 
Real Rate Of Return
The annual percentage return realized on an investment, which ... 
Nominal Rate Of Return
The amount of money generated by an investment before expenses ... 
Inflationary Risk
The uncertainty over the future real value (after inflation) ... 
Fisher Effect
An economic theory proposed by economist Irving Fisher that describes ...