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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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