Q:
At year-end 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:
The correct answer is c).
The real interest rate, also referred to as the inflation-adjusted return, factors the eroding effect of inflation from an investment's return.
The formula is: Yield plus or minus inflation rate = real interest rate/inflation-adjusted return.
The Fed Funds rate is the market rate that banks charge each other on overnight loans of reserves.

RELATED FAQS

  1. The real rate of return is the amount of interest earned over and above the:

    a. discount rate. b. tax rate. c. inflation rate. d. risk-free rate of return. Answer: C Since the real rate of return measures ...
  2. The real rate of return is the amount of interest earned over and above the?

    The real rate of return is the amount of interest earned over and above the: a. discount rate. b. tax rate. c. inflation ...
  3. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ...
  4. 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 ...
  5. What is the relationship between inflation and interest rates?

    Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which ...
  6. Do lower interest rates increase investment spending?

    Learn how the Federal Reserve Board uses monetary policy and the federal funds rate to influence long-term interest rates ...
RELATED TERMS
  1. Inflation-Adjusted Return

    A measure of return that accounts for the return period's inflation ...
  2. Real Interest Rate

    An interest rate that has been adjusted to remove the effects ...
  3. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  4. Real Economic Growth Rate

    A measure of economic growth from one period to another expressed ...
  5. Real Rate Of Return

    The annual percentage return realized on an investment, which ...
  6. Inflation-Protected Security - IPS

    A type of fixed-income investment that guarantees a real rate ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center