Question

He real rate is 2.8 percent and the nominal rate is 6.3 percent. What is the expected inflation premium? Please use the exact (multiplicative) formulation.

A. 2.63%
B. 3.40%
C. 4.18%
D. 4.96%
E. 5.74%
F. 6.52%
G. 7.30%
H. 8.07%

Answer 1

Answer: C. 4.18%

Explanation: (1 + nominal rate) = (1 + real rate) x (1 + inflation premium)

Rearranging the formula to solve for the inflation premium, we get:

inflation premium = (1 + nominal rate) / (1 + real rate) - 1

Plugging in the given values, we get:

inflation premium = (1 + 0.063) / (1 + 0.028) - 1 = 0.0408 or 4.08%

Therefore, the expected inflation premium is 4.08%, which is closest to option C (4.18%).