Question

Given an anticipated inflation premium of 1.25% and a real rate of interest of 3.75%, what is the nominal interest rate? Round your answer to 4 decimal places. Group of answer choices

Answer 1

Answer:

n=1.05-1=5%

Explanation:

The nominal interest rate for any project/investment  is calculated using the following equation:

1+n=(1+i)(1+r)

Where

n= nominal interest rate= to be calculated

i=inflation rate=1.25% in the given question

r= real interest rate=3.75% in the given question

1+n=(1+i)(1+r)

1+n=(1+1.25%)(1+3.75%)

1+n=1.05

n=1.05-1=5%