The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This results in a real rate of interest of 4% on the bond.

Question

Quizplus · Accepted Answer

The real rate of interest is not simply the nominal rate minus the inflation premium. It is calculated using the formula: real interest rate ≈ nominal interest rate - inflation rate. However, the exact real rate can be more accurately calculated using the Fisher equation, which would not necessarily result in exactly 4% in this scenario.

The Nominal Rate of Interest on a Bond Is 7