The real risk free rate is 5% per year and the expected inflation rate is 3% per year. What is the annual nominal rate of interest?
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A. B. C. D.A
Nominal rate = (1.05)*(1.03)=8.2%.
To calculate the annual nominal rate of interest, we need to add the expected inflation rate to the real risk-free rate. The real risk-free rate represents the return on an investment with no inflation risk, while the expected inflation rate measures the anticipated increase in prices over time. By adding these two rates, we can determine the total compensation required to maintain the purchasing power of an investment.
Given: Real risk-free rate = 5% per year Expected inflation rate = 3% per year
To calculate 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
Nominal rate of interest = 5% + 3% = 8%
Therefore, the annual nominal rate of interest is 8%. The correct answer is C. 8%.