Asked by Jennifer Osorio on May 11, 2024
Verified
Assume the expected inflation rate is 5% for each of the next two years and 7% per year for the three years after. Calculate the inflation adjustment (INFL) for a 5-year loan.
A) 6.2%
B) 6.5%
C) 7.0%
D) 7.5%
Inflation Adjustment
A change made to financial figures to account for the effects of inflation and maintain the purchasing power of money over time.
5-Year Loan
A type of loan that is scheduled to be repaid through payments over a period of five years.
Expected Inflation Rate
The anticipated rate at which the general level of prices for goods and services will rise over a period, affecting purchasing power.
- Evaluate the repercussions of inflation on interest rates and recognize the adaptation for inflation in interest rate computations.
Verified Answer
MZ
Maoting ZhongMay 12, 2024
Final Answer :
A
Explanation :
The inflation adjustment (INFL) for a 5-year loan can be calculated as the average inflation rate over the period. For the first two years, the inflation rate is 5% each year, and for the next three years, it is 7% each year. The average inflation rate is calculated as: [(5% * 2) + (7% * 3)] / 5 = (10% + 21%) / 5 = 31% / 5 = 6.2%.
Learning Objectives
- Evaluate the repercussions of inflation on interest rates and recognize the adaptation for inflation in interest rate computations.