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Who loses out of the loan given the unexpectedly

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A firm owner Sally meets her banker, Tom, to work out the details of a one-year loan. Both expect that inflation will be 3%, and they agree on a nominal interest rate of 6%. In reality, the inflation rate turns out to be 1%.

Assuming there is no risk premium:

a. the expected real interest rate is 9% and the realized real interest rates is 4%.

b. the expected real interest rate is 9% and the realized real interest rates is 7%.

c. the expected real interest rate is 5% and the realized real interest rates is 3%.

d. the expected real interest rate is 4% and the realized real interest rates is 7%.

e. None of the above Identify the one best answer and provide a justification.

Also, explain who gains and who loses out of the loan given the unexpectedly higher inflation, and why

Reference no: EM132606597

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