The nominal risk-free rate of interest is a function of the
A) real risk-free rate and the investment's variance.
B) prime rate and the rate of inflation.
C) T-bill rate plus the inflation rate.
D) tax free rate plus the rate of inflation.
E) real risk-free rate and the rate of inflation.

Question

Quizplus · Accepted Answer

The nominal risk-free rate of interest is determined by adding the expected inflation rate to the real risk-free rate of interest. Therefore, the best choice is E, which states that the nominal risk-free rate depends on the real risk-free rate and the rate of inflation. The other choices are incorrect because they either include factors that do not affect the nominal risk-free rate (such as investment variance, prime rate, and tax-free rate) or do not accurately capture the relationship between the real risk-free rate and inflation (such as the T-bill rate plus inflation).

The Nominal Risk-Free Rate of Interest Is a Function of the