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20 March, 22:52

Suppose that the nominal rate of interest is 4 percent and the inflation premium is 2 percent. What is the real interest rate? % Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium? %

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  1. 21 March, 02:33
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    (A) real rate of return 2$

    (B) inflation premium 5%

    Explanation:

    The Inflation premium is an additional return over the rate of return. His goal is to compensate the loss of value in their capital due to inflation.

    nominal rate = rate of return + inflation premium

    (A)

    nominal interest rate = 4%

    inflation premium = 2%

    nominal rate - inflation premium = real interest rate

    4% - 2% = reail interest rate = 2%

    (B)

    nominal interest rate = 6%

    real interest rate = 1%

    nominal rate - inflation premium = real interest rate

    6% - inflation premium = 1%

    inflation premium = 6% - 1% = 5%
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