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Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over the course of the loan to be roughly 3%. Which statement is TRUE? As long as the bank charges a nominal interest rate of at least 5%, it will earn its expected return. If the bank charges 8% and the inflation rate is more than 3%, then the bank will have earned a higher rate of return than expected. If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected. If the bank charges an interest rate of 8% or higher, it will earn the expected return.

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sandlee09

Answer:

If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected.

Explanation:

Based on the information provided in the question it can be said that If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected. This is a simple addition problem. The bank wants to earn a minimum of 5% ROI therefore if inflation is expected to be roughly 3% you would have to add this inflation to the ROI goal that the company wants in order to calculate how much they would need to charge.

5% + 3% = 8%

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