Multiple Choice
Which of the following are main characteristics of a bond?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Which of the following is the interest rate that is actually observed in financial markets?
A
Coupon rate
B
Nominal interest rate
C
Real interest rate
D
Effective annual rate
Verified step by step guidance1
Understand the concept of nominal interest rate: The nominal interest rate is the rate of interest that is stated on a financial instrument or observed in financial markets, without adjusting for inflation or compounding effects.
Differentiate between the given options: Coupon rate refers to the fixed interest rate paid by a bond issuer, real interest rate adjusts the nominal rate for inflation, and effective annual rate accounts for compounding within a year.
Recognize that the nominal interest rate is the one directly observed in financial markets, as it represents the stated rate before any adjustments.
Consider the practical application: Nominal interest rates are used in financial instruments like loans, bonds, and savings accounts to indicate the cost of borrowing or the return on investment.
Conclude that the nominal interest rate is the correct answer based on its definition and usage in financial markets.
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