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Loretta agrees to lend Ted $750,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 9%. Both expect the inflation rate to be 3%.
i. Calculate the expected real interest rate: ________%
ii. If inflation turns out to be 4% over the life of the loan, what is the ex post (actual) real interest rate? ________% Who gains from the unexpectedly high inflation, Loretta or Ted? ________
iii. If inflation turns out to be 2% over the life of the loan, what is the ex post (actual) real interest rate? ________%
iv. Who gains from the unexpectedly low inflation, Loretta or Ted?
The relevance of reported asset values is lined with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. Give an example of an overstated asset and explain its impact..
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question 1. during periods when inflation is increasing interest rates tend to increase while interest rates tend to
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