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Homework answers / question archive / 1) Lee pays one percent per month interest on his credit card account
1) Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
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annual percentage rate. |
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compounded rate. |
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effective annual rate. |
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perpetual rate. |
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simple rate. |
2) Investors of government bonds require an 8% per annum real return. The inflation rate (CPI) is 5.50%. What is the exact nominal rate?
Select one:
a. 13.94%
b. 10.50%
c. 2.50%
d. 13.50%
e. 12.91%
Answer:
| 2. | |
| Real rate = ((1+nominal rate)/(1+inflation rate))-1 | |
| let the nominal rate be 'a' | |
| 0.08=((1+a)/(1+0.055))-1 | |
| 1+0.08=(1+a)/1.055 | |
| 1.08=(1+a)/1.055 | |
| 1+a=1.1394 | |
| a=1.1394-1 | |
| a= | 13.94% |
PFA
