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.
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