A nominal interest rate is normally composed of following elements
A) real interest rate, expected inflation rate and risk premium.
B) real interest rate and risk premium.
C) periodic interest rate, real interest rate and expected inflation rate.
D) periodic interest rate, expected inflation rate and risk premium.

Question

Quizplus · Accepted Answer

A nominal interest rate is composed of the real interest rate plus an expected inflation rate and a risk premium. The real interest rate is the base rate of interest that reflects the time value of money and the cost of lending/borrowing, whereas the expected inflation rate accounts for the decrease in purchasing power of money over time. The risk premium is an additional compensation for the risk involved in lending/borrowing.

A Nominal Interest Rate Is Normally Composed of Following Elements