1. If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%, then the inflation rate is closest to:

A) 5.70%

B) 6.20%

C) 6.55%

D) 12.25%

2. If the current inflation rate is 4% and you have an investment opportunity that pays 10%, then the real rate of interest on your investment is closest to:

A) 10.0%

B) 14.0%

C) 6.0%

D) 5.8%

3. Which of the following statements is FALSE?

A) U.S. Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds.

B) In general, if the interest rate is r and the tax rate is , then for each $1 invested you will earn interest equal to r and owe taxes of r on the interest.

C) Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan.

D) Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate.

4. Which of the following statements is FALSE?

A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.

B) The equivalent after-tax interest rate is r (1-).

C) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.

D) To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a lower interest rate than the rate on U.S. Treasuries.