Question

The real interest rate is

Select one:

A. the rate that is directly observed and quoted in financial markets.

B. the rate that a security would pay if the security had no maturity risk.

C. the rate that a security would pay if no inflation were expected over its holding period.

D. the rate charged to the corporations with the best credit rating or least amount of default risk.

Answer 1

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Answer:

Option C

Real Interest Rates A real interest rate is the interest rate that would exist on a security if no inflation were expected over the holding period (e.g., a year) of a security. As such, it meas- ures society's relative time preference for consuming today rather than tomorrow. The higher society's preference to consume today (i.e., the higher its time value of money or rate of time preference), the higher the real interest rate (RIR) will be.