Module 1.1 Interest Rates

Question 1

What is the equation for harmonic mean?

Answer 1

N / Sum 1/x

Question 2

What is the geometric mean equation?

Answer 2

Question 3

Describe the real rate of return.

Answer 3

Investors increase in purchasing power, after adjusting for inflation.

Question 4

Describe the real risk-free rate.

Answer 4

A theoretical rate on a single period loan that contains no expectations of inflation and zero probability of default.

Question 5

Describe rates of t-bills including premiums.

Answer 5

Rates observed on T-bills are nominal risk-free rates because they contain an inflation premium.

Question 6

What is the equation for Arithmetic mean?

Answer 6

(R1 + R2 + R3) / N

Question 7

Describe equation for holding period return. With & Without dividends.

Answer 7

Question 8

Describe relation between nominal risk-free rate, real risk-free rate, and expected inflation rate.

Answer 8

(1 + Nominal Risk Free rate) = (1 + real risk free rate) (1 + expected inflation)