The approximate nominal risk-free rate of interest on a bond with a real rate of 0.75% and expected inflation of 0.50% is closest to:

Question

Quizplus · Accepted Answer

The nominal risk-free rate of interest can be approximated using the Fisher equation, which is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Plugging in the given values: (1 + nominal rate) = (1 + 0.0075) * (1 + 0.005), which gives a nominal rate close to 1.25%.

The Approximate Nominal Risk-Free Rate of Interest on a Bond