The nominal risk free rate of interest is a function of
A) the real risk free rate and the investment's variance.
B) the prime rate and the rate of inflation.
C) the T-bill rate plus the inflation rate.
D) the tax free rate plus the rate of inflation.
E) the 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 rate of inflation to the real risk free rate. This is because investors require compensation not only for the time value of money but also for the loss of purchasing power due to inflation. Therefore, the best choice is E as it includes both the real risk free rate and the rate of inflation.

The Nominal Risk Free Rate of Interest Is a Function