Delilah says borrowers who already have loans with a fixed interest rate can benefit from increases in inflation rates. Explain whether Delilah's statement is correct.
Delilah's statement is correct. When inflation rates increase, the lender decreases the principal by the rate of inflation, reducing the cost of the loan.
Delilah's statement is correct. When inflation rates are greater than the interest rate, the value of the borrower's future payments is less than the cost of the principal and the time value of money.
Delilah's statement is not correct. When inflation rates exceed the fixed interest rate, the value of the borrower's future payments increase, which makes the loan more expensive for the borrower.
Delilah's statement is not correct. The fixed interest rate on existing loans increases as inflation increases. The borrower pays more in interest, increasing the value of future payments.
Delilah's statement is not correct. When inflation rates exceed the fixed interest rate, the value of the borrower's future payments increases, making the loan more expensive for the borrower.
Delilah's statement is not correct. The correct statement would be:
Delilah's statement is not correct. When inflation rates exceed the fixed interest rate, the value of the borrower's future payments increases, which makes the loan more expensive for the borrower. The fixed interest rate remains the same, and the borrower will have to pay more in interest, resulting in higher overall costs.
Delilah's statement is not correct. When inflation rates exceed the fixed interest rate, the value of the borrower's future payments actually increases, making the loan more expensive for the borrower. This is because inflation erodes the purchasing power of money over time.
To understand why Delilah's statement is incorrect, we need to understand the relationship between inflation rates and fixed interest rates. When borrowers have loans with fixed interest rates, the interest rate remains constant throughout the loan term. However, inflation rates can fluctuate and increase over time.
When inflation rates rise above the fixed interest rate, the purchasing power of money decreases. This means that the future value of the borrower's payments will be worth less in real terms. In other words, the borrower will be paying back the loan with money that has a lower purchasing power, effectively making the loan more expensive.
To explain this concept further, let's consider an example. Suppose a borrower has a loan with a fixed interest rate of 4% and inflation increases to 5%. In this case, the cost of the loan increases because the borrower's future payments are being made with money that is worth less due to the higher inflation rate.
In summary, inflation rates that exceed the fixed interest rate on existing loans make the loan more expensive for the borrower. Therefore, Delilah's statement is not correct.