Hey Guys, A quick concept check , does the risk free rate include inflation?
it is not inflation adjusted…other wise the post would be titled Real Interest!
Ok so the Nominal risk free rate = Real rate + Inflation and the the real risk free rate = Nominal rate - inflation So if they state the Risk Free Rate , i would assume they mean the Real Rate?
No - the rf rate is a nominal rate.
I think we should not confuse real/ nominal rate with risk free rate. Nominal/ real rate is only a dscription of any rate that is including or excluding inflation whereas risk free rate is risk free usually T-bill or not risky government bonds. In my opinion it includes inflation - it does not interfer its risklessness. What is your opinion?
The nominal rate or “Stated” rate is the rate observed in the market. The Nominal rate can be either a risk-free rate (for a risk free rate, we typically use some sort of government security rate like T-Bill or T-Bond rates) or a risky rate like those on corporate bonds. Either was, a rate observed in the market is a Nominal rate that includes both the real rate and inflation expectations (and, for non-government securities, a risk premium). From a practical standpoint, on the exam, a “risk free rate” without the “real” qualifier is a Nominal risk-free rate.