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End-of-Chapter Solutions Ch14

End-of-Chapter Solutions Ch14 - QuickCheck 1a True 1b True...

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CHAPTER 14 – ANSWERS TO END-OF-CHAPTER PROBLEMS Quick Check 1a. True. 1f. False. 1b. True. 1g. True. 1c. True. 1h. True. 1d. False. 1i. False. 1e. True. 2a. Real.  Nominal profits are likely to move with inflation; real profits are easier to forecast. 2b. Nominal.  The payments are nominal. 2c. Nominal.  If lease payments are in nominal terms, as is typical. 3a. Exact: 1.96%;  Approximation: r   2% 3b. 3.60%; 4% 3c. 5.48%; 8% 4a. No.  Otherwise, nobody would hold bonds.  Money would be more appealing: it pays at  least a zero nominal interest rate and can be used for transactions. 4b. Yes.   The real interest rate will be negative if expected inflation exceeds the nominal  interest rate.  Even so, the real interest rate on bonds (which pay nominal interest) will  exceed the real interest rate on money (which does not pay nominal interest) by the  nominal interest rate.  4c. A negative real interest rate makes borrowing  very attractive and leads to a large  demand for investment.   4d. Answers will vary. 5a. In order to answer this question, we need to assign a discount rate.   In general, the  discount rate will be the interest rate.  So, in the first case, EPDV = $2,000*(1-0.25) and 
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