Problem 1. Calculate the nominal rate of interest given the following (you must show the formula):...

Problem 1. Calculate the nominal rate of interest given the following (you must show the formula):

The real rate of interest = 2%

Expected Inflation = 4%

The Risk Free rate = 6%

All risk factors = 3%

Expert Solution

Calculate the nominal rate of interest?

Answer: 6.08%

Working

Formula for calculating nominal rate of interest is as follows

Nominal rate of interest = (1 + Real rate of interest) * (1 + Expected Inflation) – 1

= (1 + 0.02) * (1 + 0.04) – 1

= (1.02) * (1.04) – 1

= 0.0608

= 6.08%

Note: Information provided in the question

Real rate of interest = 2% (i.e. 0.02)

Expected Inflation = 4% (i.e. 0.04)

jeff jeffy answered 2 years ago

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