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The nominal or quoted interest rate is calculated based on several components. It is deter

The nominal or quoted interest rate is calculated based on several components. It is deter

The nominal or quoted interest rate is calculated based on several components. It is determined using the following equation: Quoted Interest Rate,(r) IP DRP LP MRP r. s the real risk-free rate, referred to as the rate that would exist in an inflation-free world on a riskless security. u.s. Treasury securities are considered to be riskless securities, since they are backed by the US. government. Considering there is no inflation, the rate on a riskless us. Treasury security would be considered as the real risk-free rate. This rate is not static but keeps changing based on the expected rate of return on productive assets traded among investors and borrowers. The real risk-free rate also depends on an investor's time preference for current versus future consumption. rwr is the nominal risk-free rate, or quoted risk-free rate. Consider all risk-free rates as nominal risk-free rates unless noted. is the rate on a riskless security that includes an inflation premium for expected inflation. It is calculated as follows: rRF m r* Inflation Premium Treasury Inflation Protected Seourities (TIPS) are considered to be free of most risks, TIPs are free of default, maturity, and liquidity risks and of risk due to changes in the general level of interest rates, Thus, the rates on TIPs are considered to be a good indicator of the risk free rate. lp stands for the inflation premium that is added to the real risk-free rate to compensate for the expected increase in the value of goods and services due to inflation. The infation premium is calculated based on the expected changes nation over the entire life of the security, not the rate of inflation in the past-but you can use inflation ratae

 

Abhinav 02-Dec-2019

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