Discussion:
What are the differences between real and nominal rates? Explain why this is important to induce action on the part of borrowers and lenders?
What is meant by the term "market equilibrium", and why is this important within the study of supply and demand for the Bond Market?
What is the real interest rate if the nominal interest rate is 12% and inflation is expected to produce a 10% increase (for the cost of assets) over the same period? Describe whether the result is good for borrowers, lenders, or both. (Show all work/calculations/formulas.)
If Wilma borrows $5,000 from her brother (at 5% interest per year) and the loan matures in 10 years, how much will she have to pay annually to pay the loan off in 10 years? How much will she have to pay annually to pay the loan off in four years? (Show all work/calculations/formulas. You may use a financial calculator, but must identify your methodology.)