Homework Answers
Nominal or quoted Risk free rate = real risk free rate + inflation premium
Where,
Nominal or quoted Risk free rate = 4.8%
Real risk free rate =?
Inflation premium = expected inflation rate = 3.2%
Therefore,
4.8% = real risk free rate + 3.2%
Or real risk free rate = 4.8% - 3.2% = 1.6%
Now as the expected inflation rate changed to 4.5%; therefore new inflation risk premium = 4.5%
Therefore,
New Nominal or quoted Risk free rate = Real risk free rate + new inflation risk premium
= 1.6% + 4.5% = 6.10%
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