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Risk-free rate and risk premiums The real rate of interest is currently 3%; the inflation expectation and risk premiums for a number of securities follow.

Risk-free rate and risk premiums The real rate of interest is currently 3%; the inflation expectation and risk premiums for a number of securities follow.

Inflation expectation

Security Premium

Risk Premium

A 6% 3%
B 9 2
C 8 2
D 5 4
E 11 1

a. Find the risk-free rate of interest, RF, that is applicable to each security.

b. Although not noted, what factor must be the case of the differing risk-free rates found in part a?

c. Find the nominal rate of interest for each security

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