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leva [86]
3 years ago
12

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? %
Business
1 answer:
V125BC [204]3 years ago
4 0

Answer:

(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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On December 31, 2019, Coolwear, Inc. had a balance in its supplies account of $48,400. During 2020, $86,000 was paid for new sup
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