Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over the course of the loan to be roughly 3% (and assuming not risk of default).
Which statement is TRUE?
a. If the bank charges an interest rate of 8% or higher, it will earn the expected return.
b. As long as the bank charges a nominal interest rate of at least 5%, it will earn its expected return.
c. If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected.
d. If the bank charges 8% and the inflation rate is more than 3%, then the bank will have earned a higher rate of return than expected.
Answers: 2
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Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over...
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