The nominal risk-free rate is equal to: A) one plus the real risk-free rate times one plus expected inflation. B) the real risk-free rate plus expected inflation, minus one. C) one plus the real risk-free rate times one plus expected inflation, minus one. D) the real risk-free rate minus expected inflation.

Answer is C. Thought I’d post this since most would assume it’s just Real+Expected Inflation premium. I did

Thanks, I fell for the same assumption. Tack it on the How the F did I screw that up thread.

chad17 Wrote: ------------------------------------------------------- > Answer is C. Thought I’d post this since most > would assume it’s just Real+Expected Inflation > premium. > > I did And the difference between those two is negligible (it’s like 5% of 3% or whatever).

(1+rf)(1+IP)-1 =Nrf

nominal risk free rate = [(1 + real risk free rate)(1 + expected inflation rate)] – 1

Question about this: Why does it seem that the words nominal and real have different meanings depending on if they’re use with inflation or GDP? For example: nominal risk free rate = (1 + real)(1+ inflation) -1 ~ real + inflation BUT Real GDP = nominal GDP + inflation It seems that in the first example, you add the real to the inflation to get the nominal, but in the second example, you add the nominal to the inflation to get the real.

Real GDP = nominal GDP + inflation - This is an approximate measure.

I know but the point is, you’re adding the “inflation effect” TO nominal gdp to get the real gdp. With risk free rates, you’re adding the “inflation effect” TO the real rfr to get the nominal risk free rate. Because of the change in the use of the words real and nominal, it looks as if Real GDP is an inflation adjusted number, while NOMINAL risk free rate is an inflation adjusted number. Does this make sense?

I see what your saying. I don’t know though… We should probably keep them exclusive with GDP and Nominal Interest rates since they are different topics.