Inflation is expected to be 3 percent over the next year. You desire an annual r
ID: 2653065 • Letter: I
Question
Inflation is expected to be 3 percent over the next year. You desire an annual real rate of return of 2.5 percent on your investments.
What nominal rate of interest would have to be offered on a one-year Treasury security for you to consider making an investment?
b. A one-year corporate debt security is being offered at 2 percentage points over the one-year Treasury security rate that meets your requirement in (a). What would be the nominal interest rate on the corporate security?
PLEASE ANSWER IN EXCEL FORMAT
Explanation / Answer
Answer:
a. Calculation of Nominal Interest rate for treasury security
Nominal interest rate = Real interest * (1+ Inflation rate)
=2.5% * (1+3%)
= 2.575 %
b. Calculation of Nominal Interest rate for Corporate debt
= 2.575 + 2 = 4.575%