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Your Albanian treasury bond pays interest annually and has a yield to maturity of 9.75 percent. The annual inflation rate is
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Answer #1

B. 7.60 percent

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

(1 + 0.0975) = (1 + r)(1 + 0.02)

r = [(1 + 0.0975) / (1 + 0.02)] – 1

r = 0.0760 or 7.60%

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