Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of:.
a. 5%.
b. 4%
c. 3%.
d. 2%.

a. 5%.

Explanation:

If Saladin is willing to lend her friend Astro $500 to buy a new smart phone. and wants a 3% real rate of return on the loan when it is paid back at the end of the year. If she believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of 5%.

The reason is that inflation depletes the value of returns received by lenders because of the reduction in the purchasing power of money. The nominal rate in order to return a real rate of is that which has been adjusted for inflation.

Therefore Nominal Rate = Rate of required return 3% + Inflation rate 2% = 5%

Nominal interest rate is 5%

Explanation:

Nominal interest rate is the rate of return that is made up of real rate and inflation rate i.e 3%+2%=5%

In charging the nominal interest rate , the lender assumes that other risks  that should also  be compensated for , do not apply to the transaction at hand.

The other risks that the lender might also want to consider apart from inflation risk are itemized below:

Liquidity risk

Maturity risk

Default risk

Liquidity risk is the potential loss that could arise from forced sale of investment for liquidity preferences- needs for urgent cash.The proceeds derivable from sale such  is usually lower than the bond fair value,hence the difference is due to liquidity risk that should be compensated

Maturity risk requires that the investor be paid maturity risk premium to cover for the sensitivity of bond value to changes in interest rates.

Default  risk is the risk that the borrower may fail to make available to the lender  the contracted cash flow at the contracted time .

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

the investment was $14,174.196

explanation:

a lump sum means that the father of the example made one deposit and leave it be.

we need to know the value of a capital that generated at 4.05% per year during 28 years the sum of $48,613.24

now clearing the formula to solve for capital we got:

and we reach the answer investment = $14,174.20