What does the interest rate represent? How would a period of high inflation affect interest rates? In your own words, what does the “real rate of interest” mean?
2. What are the three pieces that make up the returns on Treasury securities? The first term you explained above. Why is an investor compensated for the second and third terms?
3. Fill in the blanks for the following with either “higher” or “lower”: Bonds with higher levels of risk result in ______ interest rates. Bonds with lower levels of risk result in ______ interest rates.
