G3 P4.8 The risk-free rate is 4.8%, and expected inflation is 3.2%. If inflation expectation such...

Question

Question

business finance

Answer 1

Answer #1

Nominal or quoted Risk free rate = real risk free rate + inflation premium

Where,

Nominal or quoted Risk free rate = 4.8%

Real risk free rate =?

Inflation premium = expected inflation rate = 3.2%

Therefore,

4.8% = real risk free rate + 3.2%

Or real risk free rate = 4.8% - 3.2% = 1.6%

Now as the expected inflation rate changed to 4.5%; therefore new inflation risk premium = 4.5%

Therefore,

New Nominal or quoted Risk free rate = Real risk free rate + new inflation risk premium

= 1.6% + 4.5% = 6.10%

Answer 2

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