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11 June, 12:35

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of:

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  1. 11 June, 15:05
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    10.24%

    Explanation:

    The computation of the firm an annual interest is shown below:

    = { (1 + annual interest rate) * (1 + inflation rate) - 1}

    = { (1 + 6%) * (1 + 4%) - 1}

    = (1.06 * 1.04) - 1

    = 1.1024 - 1

    = 10.24%

    All other information which is given is not relevant. Hence, ignored it

    We simply multiply the annual interest rate and the rate of inflation and than subtract it by 1 so that the accurate annual interest rate can come.
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