You are an investor looking to invest in a debt security. After considerable research you narrow...

 

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You are an investor looking to invest in a debt security. After considerable research you narrow your choices down to two securities in two different countries with different inflation rates. The research on the two countries, Option A and Option B, is summarised as follows: Option A Option B Nominal interest rate Rate of inflation 13% 11% 6% 4% Assuming all other factors are the same, a rational investor would 3 of 3 ID: FMW1.09.104 The interest rate is not only determined by the direct changing of the overnight cash rate by the central bank. There are other factors which affect the level of interest rate at any given time, one of them being inflation. a) The inflation effect has the most impact on You are an investor looking to invest in a debt security. After considerable research you narrow your choices down to two securities in two different countries with different inflation rates. The research on the two countries, Option A and Option B, is summarised as follows: Option A Option B Nominal interest rate Rate of inflation 13% 11% 6% 4% Assuming all other factors are the same, a rational investor would 3 of 3 ID: FMW1.09.104 The interest rate is not only determined by the direct changing of the overnight cash rate by the central bank. There are other factors which affect the level of interest rate at any given time, one of them being inflation. a) The inflation effect has the most impact on

Answer rating: 100% (QA)

To determine which option a rational investor would choose we need to compare the real interest rates of the two options The real interest rate ... View the full answer