A practice question on interest rates:
If explaining the concept of interest rates to an investing client, you would likely describe the concept in which of the following ways?
A. the real interest rate is the rate earned after taxes
B. the real interest rate is the rate earned adjusted for risk (i.e. beta, standard deviation)
C. the real interest rate is established by the Federal Reserve Board at regular policy meetings
D. the real interest rate is the rate earned above CPI
EXPLANATION: keep it real--if you earn 5% on your preferred stock when prices are rising 6%, you are losing ground; your real interest rate is negative. Inflation is measured by CPI; the real interest rate is only the amount you earn above inflation.
ANSWER: D
No comments:
Post a Comment