Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interestrate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (rº =4%).Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (A )turns out to be 6%.Expected inflation a year ago was 4%.Actual inflation (1) is(greater than/lower than) expected inflation ( n°, .The ex-ante real interest rates is_%.The ex-post real interest rates is%.Conclusion from scenario I:When actual inflation is greater than expected inflation, ex-ante real interest rate is_(greaterthan/lower than) the ex-post real interest rate, which means that borrowers are made(worseoff/better off) and lenders are made(worse off/better off).Nominal interest rates should(rise/fall) according to the Fisher effect.

The rate at which prices rise over time, resulting in a decrease in money's purchasing power is…

Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interest rate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (Te =4%). Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (1 )turns out to be 6%. Expected inflation a year ago was 4%. Actual inflation (T) is (greater than/lower than) expected inflation ( 7e,. The ex-ante real interest rates is %. The ex-post real interest rates is_ %. Conclusion from scenario I: When actual inflation is greater than expected inflation, ex-ante real interest rate is (greater than/lower than) the ex-post real interest rate, which means that borrowers are made _(worse off/better off) and lenders are made (worse off/better off). Nominal interest rates should (rise/fall) according to the Fisher effect.

Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interest rate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (Te =4%). Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (1 )turns out to be 6%. Expected inflation a year ago was 4%. Actual inflation (T) is (greater than/lower than) expected inflation ( 7e,. The ex-ante real interest rates is %. The ex-post real interest rates is_ %. Conclusion from scenario I: When actual inflation is greater than expected inflation, ex-ante real interest rate is (greater than/lower than) the ex-post real interest rate, which means that borrowers are made _(worse off/better off) and lenders are made (worse off/better off). Nominal interest rates should (rise/fall) according to the Fisher effect.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section4.17: Amortized Loans

Problem 1ST

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