Question

Given an anticipated inflation premium of 1.45% and a real rate of interest of 4.34%, what is the nominal interest rate? Round your answer to 4 decimal places. Group of answer choices

Answer 1

5.8529%

Explanation:

The computation of the nominal interest rate is shown below:-

Nominal interest rate = (1 + Inflation premium) × (1 + Real rate of interest) - 1

= (1 + 1.45%) × (1 + 4.34%) - 1

= (1 + 0.0145) × (1 + 0.0434) - 1

= 1.0145 × 1.0434 - 1

= 1.058529 - 1

= 0.058529

or

= 5.8529%

Therefore for computing the nominal interest rate we simply applied the above formula so that the nominal interest rate could come