The nominal rate on a three year Treasury Bond, which is the risk-free rate plus the inflation premium, is <u>6%</u>.
<h3>What are nominal rates?</h3>
The nominal interest rate (also known as the money interest rate) is the percentage of interest that the borrower pays to the lender for a loan.
The nominal interest rate includes the real rate and the inflation premium.
<h3>Data and Calculations:</h3>
Risk-free rate = 2%
Inflation premium = 4.0%
Maturity risk premium = 3.7%
Liquidity premium = 3%
Default risk premium = 3.5%
Nominal rate for Treasury Bond = Risk-free rate plus Inflation premium
= 6% (2% + 4%)
Thus, the nominal rate on a three year Treasury Bond is <u>6%</u>.
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