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Any lender about to make a loan wishes to know the real rate of intere

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Any lender about to make a loan wishes to know the real rate of intere  [#permalink]

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New post 26 Jul 2019, 13:13
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Any lender about to make a loan wishes to know the real rate of interest; i.e., ,the contractual rate of interest less the rate of inflation. But what rate of inflation to use, past or expected? Past inflation is the better choice because we have specific firm figures for.it so that the real rate of interest will also emerge as a specific figure.

Which of the following, if true, is the strongest point that an opponent of the position above might make in arguing that the rate of expected inflation is the proper figure to use?

(A) Since the contractual interest is future income to a prospective lender, it is more appropriate to adjust that income in terms of inflation expected for the future.
(B) Since estimating the rate of expected inflation presupposes careful economic analysis, lenders might derive coincidental benefits from doing such an estimate.
(C) The rate of expected inflation will differ little from the rate of past inflation when inflation is steady.
(D) No official rate of past inflation is computed for any period shorter than a month.
(E) The official rate of past inflation is a figure that depends on what commodities, in what proportions, determine the official price index.

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Re: Any lender about to make a loan wishes to know the real rate of intere  [#permalink]

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New post 01 Aug 2019, 12:31
carcass wrote:
Any lender about to make a loan wishes to know the real rate of interest; i.e., ,the contractual rate of interest less the rate of inflation. But what rate of inflation to use, past or expected? Past inflation is the better choice because we have specific firm figures for.it so that the real rate of interest will also emerge as a specific figure.

Which of the following, if true, is the strongest point that an opponent of the position above might make in arguing that the rate of expected inflation is the proper figure to use?

(A) Since the contractual interest is future income to a prospective lender, it is more appropriate to adjust that income in terms of inflation expected for the future.
(B) Since estimating the rate of expected inflation presupposes careful economic analysis, lenders might derive coincidental benefits from doing such an estimate.
(C) The rate of expected inflation will differ little from the rate of past inflation when inflation is steady.
(D) No official rate of past inflation is computed for any period shorter than a month.
(E) The official rate of past inflation is a figure that depends on what commodities, in what proportions, determine the official price index.


Real ROI = Contractual ROi - Inflation Rate

Now the problem regarding the use of Inflation Rate depends on the Highlighted part of the stimulus ( Using specific figure terms for past Inflation Rate ) rather than future inflation rate....

Prethink we have 2 instantly -

1. Past Inflation rate keeps changing ( Which one to take Inflation rOI for past year/Month/Quarter etc.....)
2. Future rate can be predicted reasonably.

(A) Clearly talks in line of our point No 2. and is hence the strongest point that an opponent of the position above might make....
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Re: Any lender about to make a loan wishes to know the real rate of intere  [#permalink]

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New post 07 Aug 2019, 06:28
Abhishek009 wrote:
carcass wrote:
Any lender about to make a loan wishes to know the real rate of interest; i.e., ,the contractual rate of interest less the rate of inflation. But what rate of inflation to use, past or expected? Past inflation is the better choice because we have specific firm figures for.it so that the real rate of interest will also emerge as a specific figure.

Which of the following, if true, is the strongest point that an opponent of the position above might make in arguing that the rate of expected inflation is the proper figure to use?

(A) Since the contractual interest is future income to a prospective lender, it is more appropriate to adjust that income in terms of inflation expected for the future.
(B) Since estimating the rate of expected inflation presupposes careful economic analysis, lenders might derive coincidental benefits from doing such an estimate.
(C) The rate of expected inflation will differ little from the rate of past inflation when inflation is steady.
(D) No official rate of past inflation is computed for any period shorter than a month.
(E) The official rate of past inflation is a figure that depends on what commodities, in what proportions, determine the official price index.


Real ROI = Contractual ROi - Inflation Rate

Now the problem regarding the use of Inflation Rate depends on the Highlighted part of the stimulus ( Using specific figure terms for past Inflation Rate ) rather than future inflation rate....

Prethink we have 2 instantly -

1. Past Inflation rate keeps changing ( Which one to take Inflation rOI for past year/Month/Quarter etc.....)
2. Future rate can be predicted reasonably.

(A) Clearly talks in line of our point No 2. and is hence the strongest point that an opponent of the position above might make....


What is the issue with B?
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Re: Any lender about to make a loan wishes to know the real rate of intere   [#permalink] 07 Aug 2019, 06:28
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