If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates?
A) 1%
B) 2%
C) 5%
D) 7%

Question

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates? 
A) 1%
B) 2%
C) 5%
D) 7%

Quizplus · Accepted Answer

The simplest form of market interest rates can be calculated by adding the real interest rate, the inflation premium, and the default risk premium together. In this case, 4% (real interest rate) + 2% (inflation premium) + 1% (default risk premium) = 7%.

If You Expect the Inflation Premium to Be 2%, the Default