If the nominal rate of interest is 11%, the risk-free rate of interest is 2%, the default premium is 4%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______.
A) 2.0%
B) 2.5%
C) 3.0%
D) 3.5%

Question

Quizplus · Accepted Answer

The nominal rate of interest is the sum of the risk-free rate, default premium, liquidity premium, maturity premium, and inflation premium. Therefore, 11% = 2% + 4% + 0.5% + 1.5% + inflation premium. Solving for the inflation premium gives 3%.

If the Nominal Rate of Interest Is 11%, the Risk-Free