Question

Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction?

Answer 1

Myron gains while the bank loses.

Step-by-step explanation:

The real interest rate obtained by Myron = nominal interest rate - inflation rate

since the inflation rate was negative (deflation), then the real interest rate increased:

real interest rate = 3% - -5% = 8% (a double - results in a +)

On the other hand, the real interest rate paid by the bank also increased by 5%, since a bank deposit is similar to loaning money to the bank. The bank lost money with this transaction but it will gain money form the loans it made to other clients since the real interest rate that they charge will also increase by 5%.

Answer 2

Myron gains,the bank loses

Step-by-step explanation:

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.

Therefore, since the period is predetermined and the rate is fixed for that period, any drop in interest rate during the duration of the deposit to the time of maturity will be a loss to the bank.

Hence, The government reported that prices, on average, have fallen by 5% during the current year will be unfavorable to the bank.