Question
The real rate of interest is currently 3%; the inflation expectation and risk premium for a number of securities follow. Inflation Expectation Security Premium Risk
The real rate of interest is currently 3%; the inflation expectation and risk premium for a number of securities follow.
| Inflation Expectation | ||
| Security | Premium | Risk premium |
| A | 6% | 3% |
| B | 7 | 2 |
| C | 8 | 2 |
| D | 3 | 6 |
| E | 11 | 1 |
a) Find the risk-free rate of interest, that is applicable to each security.
Answer given:
| Security | Real Rate (a) | Inflation Expectation Premium (b) | Risk-free Rate (a+b) |
| A | 3% | 6% | 9% |
| B | 3% | 7% | 10% |
| C | 3% | 8% | 11% |
| D | 3% | 3% | 6% |
| E | 3% | 11% | 14% |
b) What is the nominal rate of interest for each security? Note: Add the risk premium to the number computed above as the risk free rate. Show all calculations.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Finance Directors Handbook
Authors: Glynis D Morris, Sonia McKay, Andrea Oates
5th Edition
1566768691, 978-1566768696
