The expected inflation rate in Finland is 3.67 percent while it is 2.45 percent in the United States.A risk-free asset in the United States is yielding 3.21 percent.What real rate of return should you expect on a risk-free Finnish security?

Question

Quizplus · Accepted Answer

The real rate of return can be calculated using the Fisher equation: 
Real rate = Nominal rate - Inflation rate 
For the risk-free asset in the US, the real rate is: 
Real rate = 3.21% - 2.45% = 0.76% 
To calculate the real rate for the risk-free Finnish security, we can use the same equation: 
Real rate = Nominal rate - Inflation rate 
Nominal rate = Inflation rate + Real rate 
Nominal rate = 3.67% + 0.76% = 4.43% 
Therefore, the real rate for a risk-free Finnish security is 4.43%. 
The closest answer choice is D (4.43%).

The Expected Inflation Rate in Finland Is 3