The real risk free rate is 6% per year and the expected inflation rate is 2% per year. What is the annual nominal rate of interest?
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A. B. C. D.B
Nominal rate = (1.06)*(1.02)=8.1%.
To calculate the annual nominal rate of interest, we need to add the real risk-free rate and the expected inflation rate.
Given: Real risk-free rate = 6% per year Expected inflation rate = 2% per year
The real risk-free rate represents the return on an investment with zero risk, adjusted for inflation. In this case, it is 6% per year.
The expected inflation rate represents the rate at which prices are expected to rise over the given period. In this case, it is 2% per year.
To find the nominal rate of interest, we add the real risk-free rate and the expected inflation rate:
Nominal rate of interest = Real risk-free rate + Expected inflation rate
= 6% + 2%
= 8%
Therefore, the annual nominal rate of interest is 8%.
The correct answer is option D: 8%.