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Answer 1:
a. False. This is because the nominal interest rate is found using the formula (1 + 8%)/(1 + 2%) – 1. The method showed is an approximation method.
b. True. This is because the investors take long and short positions according to their expectations and that influences the forward rate.
c. False. This is because the next cash flow would be in nominal terms and it cannot be discounted using real discount rate. The real cash flows should be discounted using ...
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