Question

Statement 1: The onset of 5% inflation means that your receipt of a $100 interest payment allows you to purchase only $95 worth of goods and services. Statement 2: For the average rational investor or saver, there is an indirect, or inverse, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver. Statement 3: It is a mathematical impossibility for the expected future inflation rate to be greater than the real risk-free rate of return on an investment. Statement 4: All things being equal, savers and investors expect to receive some amount of maturity premium as compensation for their deferred consumption. The true statements are_______________.a. 1 and 4b. 1 and 3c. 2 and 3d. 2 and 4

Answer 1

Answer:

A. 1 and 4 are true

Explanation:

Statement 1: When inflation goes up the market prices of goods increase and reduces buying power of customer. So, if you get $100 even after 5% inflation, you would get $95 worth good.

Statement 2: It is commonly known as, the higher the risk the higher the gain. So, risk premium and risk exhibited by security is directly related with each other.

Statement 3: Since, risk free rate is the compensation for time value of money, that is why it can’t make real risk-free rate negative because real risk rate is there, but inflation can go higher than risk free rate.

Statement 4: Maturity payment is paid to investors or savers after certain period of time along with principal amount.

Hence, A. 1 and 4 are true