The risk premium for an investment is 3 percent

Finance Sep 27, 2020

The risk premium for an investment is 3 percent. The inflation premium is 4 percent. If the pure rate of interest in the market is 3.0 percent, what should be the yield on a risk-free security? Use exact formulation.

A. 8.16%

B. 6.60%

C. 6.08%

D. 9.72%

E. 9.20%

F. 7.64%

G. 8.68%

H. 7.12%

Expert Solution

Nominal Rate = ((1+Real Rate)*(1+Inflation))-1

= ((1+ 3%)*(1+ 4%))-1

= 7.12%

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