The nominal interest rate minus the expected rate of

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53) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a better measure of the incentives to borrow and lend than is the nominal interest rate. C) is a more accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D) indicates all of the above. E) indicates only (A) and (B) of the above. Answer: D 54) The nominal interest rate minus the expected rate of inflation 55) In which of the following situations would you prefer to be making a loan? 56) In which of the following situations would you prefer to be borrowing? 31 57) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A) 5 percent B) 10 percent C) -5 percent D) 25 percent E) None of the above Answer: D 58) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? 59) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is 60) The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is 61) Which of the following are generally true of all bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. C) The longer a bond’s maturity, the greater is the size of the price change associated with an interest rate change. D) All of the above are true. E) Only (A) and (B) of the above are true. Answer: D 32

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